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Monetary policy minutes: Growth concerns take front seat
In the Aug ’19 monetary policy review, the MPC cut repo rate by an unconventional 35bps and retained the stance at ‘accommodative’. The RBI released minutes of the meeting today. Below, we present the key takeaways from the minutes:
* Growth concerns take front seat…: In the Aug ’19 monetary policy minutes, the most common topic of discussion was growth. Almost all MPC members discussed headwinds to growth in detail. They cited slack in high-frequency indicators such as fall in seasonally-adjusted capacity utilization, weak IIP growth, auto sales, core sector growth, capital goods imports and various surveys to highlight that growth in Q1FY20 was likely weak and the outlook for coming months wasn’t particularly bright. We agree with this assessment. We expect growth in Q1FY20 to come in at ~5.7%, almost flat from the preceding quarter’s 5.8% while full-year growth for FY20 is likely to be little below 7%.
* …slowing private consumption most worrying: The most worrying aspect of the current slowdown is the weak private consumption. MPC members expressed concern that private consumption, which is the bedrock of domestic demand, was slowing. Dr. Michael Patra also added that the fiscal stimulus from 7th Pay Commission and OROP accounted for 0.9% of GDP in FY18 and 0.3% of GDP in FY19. Since this stimulus was in the form of higher revenue expenditure, it is likely to fade out completely from FY20.
* Members feel monetary policy should offset contractionary budget: Dr. Dholakia, who is the most dovish member on the committee, added that the Union Budget for FY20 was on a tighter side rather than expansionary side. The government’s commitment to stick to the consolidation path over the next two years despite the current slowdown and negative output gap was further adding to woes. Hence, he added, monetary policy should ‘do its bit’ to boost growth. We differ from this assessment for a couple of reasons. Firstly, although the official fiscal deficit number for FY20 was maintained at 3.3%, actual deficit number (including offbudget financing, PSBR etc) is much higher. Secondly, there is a growing talk of stimulus. The government is reportedly considering a large stimulus package for the economy including sector-specific sops. If the government announces a large stimulus package in the coming few days, fiscal policy will no longer be contractionary.
* Hawkish members highlighted incomplete transmission…: Dr. Dua, who voted for a 25bps cut, noted that although transmission had improved in recent months, it was still incomplete. Similarly, Dr. Ghate noted that given the inadequate transmission, large cut (35 bps) would burn through monetary policy space without much to show for it.
* One more rate cut likely in Oct ’19: We expect the MPC to deliver one more rate cut in the policy review in Oct ’19. We believe the two most likely options before the committee are 15bps and 25bps. If Q1FY20 growth comes in significantly below the expected 5.8%, the committee could go for 25bps cut. However, if growth is in line with expectation, a smaller 15bps cut is possible.
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