Ernest Hemingway helped an Indian economist change his mind on interest rates-- reveal the latest minutes of RBI's June meeting
- The minutes of the RBI monetary policy panel meeting were released on June 20.
- Viral Acharya, one of the members, changed his view to support a cut in interest rates in June whereas in April he thought it wasn't warranted.
- Acharya quoted
Ernest Hemingwaywhile explaining his point of view.
Acharya quoted Hemingway to explain a drastic change in his view of what the right interest rate should be for the Indian economy at this stage. Just three months ago, he had gone against the majority decision by the same panel to cut interest rates. However, in June 2019, he found himself in agreement with the rest of his colleagues.
"In spite of my dilemma, I vote – albeit with some hesitation – to frontload the policy rate cut from 6% to 5.75% (a 50 basis points rate cut from my April vote to keep the policy rate at 6.25%). This would provide an insurance to help prevent the output gap from widening further or the finance-neutral output gap (FNOG) from turning negative. The MPC will need to remain on guard and be prepared to provide such insurance in a symmetric manner if upside risks to inflation were to materialize," Acharya added.
All members of the panel entrusted with setting the country's credit policy were worried by the weakening fortunes of the Indian economy. Latest data has showed the economic growth had slowed down to the lowest in five years and the impact of the slump has been seen across sectors.
A cut in interest rate by the RBI acts as a signal for banks to lower lending rates to boost investment and consumption, which in turn would help the economy recover. "Growth impulses have clearly weakened, while the headline inflation trajectory is projected to remain below 4% throughout 2019-20," governor Shaktikanta Das said in his statement at the meeting.
The rate cut in June was the third one this year but the banks have barely budged. " It is to be noted that quite a sizable part of loan portfolio of banks continues at the base rate, which impedes monetary transmission. Interest rates on small savings are also higher than the prescribed formula," Das said in a sign of his disappointment with the banks. As global investment bank Nomura put it in its report post the June rate cut, the RBI was signalling to the banks to start lowering lending rates.
Acharya too shared the apprehensions and changed his stance to 'accommodative' along with his colleagues in a bid to boost the country's economy.
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