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Shaktikanta Das says room for rate cut if inflation moderates; RBI MPC lists out 3 macro-financial risks

The Financial Express logo The Financial Express 23-10-2020 Samrat Sharma
M. Thomas Mathew wearing a suit and tie: Shaktikanta Das said that space for rate cuts needs to be used judiciously to support recovery in growth while the ongoing transmission of past monetary policy actions would help ease financial conditions further. © Provided by The Financial Express Shaktikanta Das said that space for rate cuts needs to be used judiciously to support recovery in growth while the ongoing transmission of past monetary policy actions would help ease financial conditions further.

RBI Governor Shaktikanta Das said that there exists space for future rate cuts if the inflation evolves in line with RBI's expectations. In the minutes of the Monetary Policy Committee meeting, Shaktikanta Das added that space needs to be used judiciously to support recovery in growth while the ongoing transmission of past monetary policy actions would help ease financial conditions further. He further said that taking into account the projected moderation in inflation and the large output loss, the policy rate was kept unchanged at present and the Reserve Bank will continue with the accommodative stance, during the current financial year and into the next financial year at least.

Outlook for inflation

RBI Governor said that the food inflation should moderate on the back of good Kharif harvest and a favourable rabi season. On the other hand, 3-month ahead household inflation is expected to somewhat soften. As economic activity further normalises and supplies are restored, cost-push price pressures faced by firms are likely to dissipate, however, if supply-side shocks, especially to food persist, they can destabilise inflation expectations. Overall, RBI expects headline inflation to moderate in H2 of the current year and further in Q1 of next fiscal year.

3 macro-financial risks

MPC member Mridul K Saggar highlighted three macro-financial risks that have implications for monetary policy.  First, if growth contractions stay for long, the hysteresis that has been substantially arrested could stage a comeback creating renewed feedback loops within public, corporate and bank balance sheets that would impact the stock of debt as well as fiscal and saving-investment balances. If this happens, recovering potential output will take longer and it will push the neutral interest rate lower than before. 

Second, if current real negative interest rates fall further, it may generate significant distortions that could adversely affect aggregate savings, current account, and medium-term growth in the economy. He further mentioned the third concern related to interactions between monetary policy and financial stability, which could intensify further, especially later into next year. 

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