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RBI Constrained In Cutting Lending Rates Due To Inflation - Posted on: 21-08-2020

RBI governor Shaktikanta Das said that at this juncture it is important to keep our arsenal dry and use it judiciously

The Reserve Bank of India (RBI) believes that there is room for further rate cut but it is unlikely to implement it any time soon due to rising inflation, minutes of the central bank's last monetary policy committee (MPC) meeting suggested. According to the minutes released on Thursday, RBI Governor Shaktikanta Das  said, "Although there is headroom for further monetary policy action, at this juncture it is important to keep our arsenal dry and use it judiciously."

After a three-day brainstorming earlier this month, all the six members of the MPC, headed by Mr Das had opted for a status quo and left interest rates unchanged. However, the MPC maintained an accommodative stance, implying more rate cuts in future if the need arises to support the coronavirus-hit economy.

As per the minutes, Mr Das also said it would be prudent at this stage to wait for a firmer assessment of the outlook for growth and inflation.

"It would be prudent at this stage to wait for a firmer assessment of the outlook for growth and inflation as the staggered opening of the economy progresses, supply bottlenecks ease and the price reporting pattern stabilizes," Mr Das said.

"Inflation surprises of recent months are undermining the MPC's actions and stymieing its resolve to do what it takes to revive growth and mitigate the impact of COVID-19 on the economy," deputy governor Michael Patra wrote in the minutes.

The MPC is mandated to maintain inflation at 4 per cent over the medium term and keep it within a 2 per cent to 6 per cent range at all times. A breach of this band for three straight quarters would require the committee to offer an explanation to the government. Inflation has remained above this range in the last two quarters.

"This should be a crisis that is not wasted. The government must continue to focus on much needed structural reforms. Some fiscal space should be reserved for later outbreaks," another MPC member Chetan Ghate wrote. Almost all members however said that growth is still fragile and that while accurate growth forecasts are not possible at the moment point, the country was likely to see a significant contraction in 2020-21, making it difficult to completely ignore the risks to growth.

Mr Ghate also said that he has been advocating a more cautious path for policy rate reductions since February 2019.

"However, I have been in a minority in the MPC. Inflation has now been above the upper band of 6 per cent for a number of months. Notwithstanding large rate cuts to spur growth over the last year and a half, growth has steadily declined despite 250 bps in cuts since February 2019," Mr Ghate noted. Future MPC meetings should not go soft on inflation, he added.

The next MPC meeting is scheduled to held during September 29 to October 1, 2020.