RBI Governor headed MPC begins deliberations on monetary policy

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The RBI's MPC on Tuesday started its three-day brainstorming on the bi-monthly monetary policy amid the urgency to revive the economy hit by COVID-19 and increased demand for loan restructuring by industry. The six-member Monetary Policy Committee (MPC) headed by the RBI Governor is scheduled to announce its decision on August 6. This is the 24th meeting of MPC.

It is to be noted here that the fast-changing macroeconomic environment and the deteriorating outlook for growth necessitated off-cycle meetings of MPC – first in March and then again in May 2020.

MPC has cumulatively cut the repo rate by 115 basis points over these two meetings, resulting in a total policy rate reduction of 250 basis points since February 2019, with an aim to boost economic growth.

Experts are, however, divided over the possibility of another rate cut by RBI arguing that one-time loan restructuring was more essential at this juncture to combat the impact of COVID-19.

The central bank has been taking steps proactively to limit the damage to the economy caused by the pandemic and lockdown.

As per a research report by the country's largest lender SBI, banks have cut rates on fresh loans by 72 basis points, the fastest transmission ever recorded.

SBI has cut by an equivalent 115 basis points on its repo linked retail loan portfolio.

The government has tasked RBI to keep inflation at 4 per cent (+, - 2 per cent). The central bank mainly factors in CPI while formulating the monetary policy.

As per the latest data, higher prices of food items especially meat, fish, cereals and pulses pushed the retail inflation based on Consumer Price Index (CPI) to 6.09 per cent in June. The inflation rate for July will be announced on August 12.

Experts are of the view that MPC would maintain accommodative stance on monetary policy in view of the fast changing macroeconomic environment.

The monetary policy was in an accommodative mode before the outbreak of COVID-19, with a cumulative repo rate cut of 135 basis points between February 2019 and the onset of the pandemic.

As MPC started its deliberations, industry body Assocham made a strong case before the panel, to consider rescheduling of bank loans across the board without making it rigid and conditional.

"There is a pressing need for a liberal, across the board debt rescheduling. While Finance Minister Nirmala Sitharaman's comments that her ministry is engaged with the RBI on the debt restructuring must be complimented, the central bank should eschew any rigid restructuring exercise.

"The benefits of the loan restructuring should reach all sectors of the economy, as the COVID-19 has spared none and the damage is widely evident," said chamber's Secretary General Deepak Sood.

As for the interest rates, he said, Assocham expects MPC to take a pragmatic view of the economy and the accommodative stance by RBI should continue.

This is the 24the meeting of MPC. The first meeting took place in October 2016.