RBI's jumbo rate cut aims to spur spending & investment
RBI
MUMBAI: RBI aimed to signal businesses that cheap funds will be available with its double-barrel rate cut earlier this month to boost growth through spending and investment. According to minutes of the monetary policy committee's meeting, the interest rate cut was triggered by signs that companies were deferring investment plans despite rising capacity utilisation even as inflation was expected to undershoot.
Continued uncertainty had pushed top executives into what central bank officials described as a 'zone of inaction'. The MPC voted for an unexpected 50-basis-point (100bps = 1 percentage point) cut in the
repo rate
or the rate at which RBI lends to banks. The MPC also voted to change the policy stance to 'neutral' from 'accommodative' which RBI governor Sanjay Malhotra said gave it room to 'cut, pause or hike rate' depending on evolving conditions.
.
'It is expected that the front-loaded rate action along with certainty on the liquidity front would send a clear signal to economic agents, thereby supporting consumption and investment through lower cost of borrowing,' the governor said in the minutes of the June 6-9 MPC meeting.
The meeting also offered a glimpse into the policy stance of deputy governor Poonam Gupta, who joined the central bank in April. Her comments suggest a dovish leaning within the current policy context.
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Gupta underscored the importance of monetary support for accelerating growth, and said policy must help the economy 'attain and even surpass past rates of growth'. She voted for a 50bps cut, citing the need to 'foster policy certainty and faster transmission'.
She also flagged the possibility of inflation falling below target.
Internal member Rajiv Ranjan also backed a 50bps cut, saying the decline in inflation was sharper than expected, giving the central bank room to focus on growth.
He said larger cuts in an expansionary phase are often needed to have the same impact on output as smaller hikes during contractionary periods. According to him, front-loading sends a stronger signal and speeds up transmission.
'It would be appropriate to provide some certainty on the domestic rate and liquidity front so that agents do not delay and postpone their decisions. Literature suggests that uncertainty plays a role in forming the 'zone of inaction',' Ranjan said.
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