Apart from the unanimity among them in cutting short-term interest rates by 25 basis points, all members of the Monetary Policy Committee also felt inflation would soften thanks to good monsoon rains, along with signs of an economic revival.
The minutes of their meeting of 3rd and 4 October 2016, released on Tuesday, suggest the members also felt the rate cut was consistent with an accommodative stance of the policy to keep retail inflation within a band of 4%, plus or minus two percentage points, while supporting growth.
"The committee expects the strong improvement in sowing, along with supply management measures, will improve the food inflation outlook," as per the minutes of the meeting.
"It notes that the sharp drop in inflation reflects a downward shift in the momentum of food inflation -- which holds the key to future inflation outcomes -- rather than merely the statistical effects of a favourable base effect," it said.
"The momentum of growth is expected to quicken with a normal monsoon raising agricultural growth and rural demand, as well as by the stimulus to the urban consumption spending from the pay commission's award," it added.
"The accommodative stance of monetary policy and comfortable liquidity conditions should support a revival of credit to the productive sectors."
The six-member committee has Reserve Bank of India (RBI) Governor Urjit Patel as chairman and the central bank's Deputy Governor R. Gandhi and Executive Director Michael Patra, as the institution's representatives.
Durign the meeting, RBI Governor Dr Patel stated that indicators of economic activity pointed to a subdued outlook, though gradually improving; further, continuing low capacity utilisation in industry and the persistence of the output gap suggested that pricing power is likely to remain low. "...while our model-based projections indicated upside risks to the target, a calibrated policy judgement was warranted, given that some space for policy action had opened up with the fall in inflation in the August reading. Nonetheless, inflation outcomes in Q4 will have to be carefully and continuously monitored as upside risks, albeit lower now than before, persist," he added.
The three outside experts are: Dr Chetan Ghate, Professor at Indian Statistical Institute; Dr Pami Dua, Director at the Delhi School of Economics; and Ravindra Dholakia, Professor at the Indian Institute of Management, Ahmedabad.
Dr Ghate stated that in view of a good monsoon, a decline in food inflation and better food supply management by the government, there has been some abatement of both cyclical and structural risks to the March 2017 consumer price index (CPI) inflation target. "With persistent slack in the economy evidenced by unutilised capacity over the past few years, corporate pricing power remains weak. The persistence of core inflation remains a concern. While I recognise that upside risks to meeting the objective of 5 per cent CPI inflation by Q4 of 2016-17 remain, given the current juncture, these are acceptable risks. Expectations of future inflation at the monetary policy horizon, as evidenced by the survey of professional forecasters, are closer to the inflation target, which is also expected to contribute to low and stable inflation," he added.
According to Dr Dua the modest softening of inflation and inflation expectations seen in some of the surveys conducted by the Reserve Bank, along with lacklustre private investment spending and unused capacity, provides a window for a reduction in the policy rate. Dr Dua says, "...while RBI's Industrial Outlook Survey suggests some increase in input price pressures in the manufacturing sector in the short-run, this is not expected to transmit to higher selling prices. On the other hand, input cost expectations are muted in the infrastructure sector. Additionally, the Survey of Professional Forecasters suggests anchoring of inflation expectations. In this backdrop, I feel that it is a good time to support growth by reducing the policy rate."
Dr Dholkia felt that some of the upside risks to inflation discussed in the MPC meeting, particularly arising out of the award of the 7th Pay Commission, were largely statistical. "Looking forward, in my opinion, the probability of inflation turning up from the current level is reasonably less. On the other hand, there are good chances for the consumer inflation to soften further substantially, benefiting from a good monsoon, supply management measures of the Government and ongoing reforms gaining traction in terms of reducing costs and improving output response," he added.
Dr Patra says, "...while staying focused on the path of disinflation set out in previous monetary policy statements, it is, in my view, most timely now to reduce the policy rate by 25 basis points and drive the actualisation of the macroeconomic configuration that seems to be forming - a reasonable probability of inflation converging to its target and the economy poised on the threshold of an acceleration of growth in the next three quarters of the year. It is crucial, however, to step up vigil around the upturn in inflation projected in the last quarter of 2016-17 to guard against any risk to the target."
Mr Gandhi of the RBI felt that while the pace is expected to gain gradual momentum, the private investment cycle remains depressed and is yet to respond adequately to the improving consumption demand. He said, "Recent data on production of capital goods, imports of capital goods and flow of credit to industry indicate the weak state of investment demand. In this environment, a rate cut according to me will help in stimulating investment demand while also easing somewhat the pressure on firms stemming from balance sheet repairs."
The committee, during its first meeting, cut a key lending rate by 25 basis points, bringing much relief to commercial banks and India Inc.
With that decision, the repurchase rate, or the short-term lending rate charged by the central bank on borrowings by commercial banks, was lowered to 6.25%, while the reverse repurchase rate automatically stood adjusted to 5.75%.