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Slow Growth Worries MPC's External Members


The concerns of two sets of members of the Monetary Policy Committee -the three nominated by the government and the other three from the Reserve Bank of India -are beginning to show divergence with economic growth figuring prominently among outsiders, minutes from the meeting show.

Outside members of the MPC have commented more about the slowing growth than the threat of inflation compared with insiders who have voiced fears over price pressures, the state of the banking industry and uncertainties on how the future would pan out.

There was near unanimity that inflationary trajectory was not as expected, but there was no conclusive evidence about whether causes were permanent or temporary.

While four voted for a quarter point cut in its August 2 policy meeting, Ravindra Dholakia who had dissented in the past too, had argued for a half point cut. RBI executive director Michael Patra was for a status quo citing `paradoxical' arguments of weak growth while every forecast is for strong growth.

"Moving on to forward looking indices that predict future economic activity, growth in the Indian Leading Index, constructed by the Economic Cycle Research Institute (ECRI), New York, is falling, as is Indian Leading Exports Index growth," said Pami Dua. "These are indicative of a fading economic growth outlook, and a pessimistic outlook with respect to exports growth."

Chetan Ghate of the Indian Statistical Institute was worried about growth. "My biggest concern at the moment is the slowing rate of capital accumulation," Ghate has written. "Indebted manufacturing companies continue to de-leverage, and envisaged capex continues to decline. A prolonged period of weak investment growth will impact potential growth."

The MPC with a mandate to keep inflation at 4 per cent with a tolerance limit of 2 percentage point on either side, has been focussed on it after years of price increase led to macro-economic complications. But the past few years of prudent policies pushed June CPI inflation to a record low of 1.54 per cent, which has since risen.

While admitting that price pressures have eased, Governor Urjit Patel said, "disentangling recent disinflation in terms of relative roles of structural and, transitory drivers remains a challenge. The present low level of food prices is unusual and is vulnerable to upward pressures."

Deputy governor Viral Acharya who voted for a quarter point cut and neutral stance noted: "I wish to reiterate that growth slowdown since Q1 2016-17 is rooted in stressed balancesheets of our banks and corporates in several sectors."

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