MPC Oct'19 minutes analysis - Another rate cut in Dec likely

RBI released the October 2019 MPC minutes which are dovish in tone thereby opening up space for another rate cut in the upcoming in Dec 2019.

Key highlights of the minutes included:

  1. (a) concerns on protracted demand based growth slowdown with global headwinds adding to the uncertainties
  2. (b) weak monetary policy transmission which could see some improvement with a lag as well as with the added impetus of external benchmarking of lending rates
  3. (c) confidence on the future trajectory of headline inflation with expectations of below the target of 4% until Q1 FY2021
  4. (d)) fiscal situation requiring monitoring

Chetan Ghate highlighted the risk of an uptick in inflationary expectations and rising food inflation. He however also mentioned that a late exit of the monsoon could augur well for Rabi crop which could have a mitigating impact on food inflation in the next couple of months. Pami Dua mentioned that while actual inflation and forecasts remain benign though subject to supply side disruptions in the oil market, domestic growth impulses from private consumption and industrial activity as well as global impetus to domestic demand remain weak. Dholakia mentioned that while transmission is essential along with further deepening of markets to aid transmission, there exists policy space of 40 bps cut in the current policy with space for more cuts until growth recovers.

Patra remained pessimistic on growth calling it a “pronounced cyclical downswing” while being sanguine on the future trajectory of inflation given growing economic slack. Kanungo is of the view that given that slowdown in growth has been led by deficient demand, there is need to “reinforce the past monetary policy measures and the recent steps taken by the government in supporting domestic demand.” Shaktikanta Das re-iterated the importance of focusing on strengthening domestic demand through policy action, in an environment of weakening private consumption, lackluster private investment and global headwinds impacting exports. He welcomed the steps taken by the government to support growth in the recent months, while asserting the need to go full throttle to revive the economy.

To Conclude, the future course of action would be dependent on the fiscal situation and headline inflation remaining below the 4% target. Given that we expect a breach on both fronts, policy action after December is expected to be data dependent even while policy stance continues to remain accommodative until growth revives. But given the comments from MPC members from the Oct'19 meeting, the Dec rate cut by a minimum of 25bps looks like a done deal.


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