Rate cut: Rajan went with technical panel’s majority view

Reserve Bank of India Governor Raghuram Rajan heeded the recommendation of majority of the external members of the monetary policy panel and cut the repo rate in the first bi-monthly monetary policy earlier this month.

The RBI had reduced the policy repo rate (the interest rate at which the central bank provides short-term liquidity to banks) by 25 basis points to 6.5 per cent from 6.75 per cent in the monetary policy statement issued on April 5 .

According to the Minutes of the March 30 meeting of the Technical Advisory Committee (TAC) on Monetary Policy, released by the RBI on Thursday, four of five external members recommended a reduction in the policy repo rate.

Of these, two members suggested a reduction of 25 basis points. These members were of the view that more emphasis could be placed on growth concerns since the inflation outturn provides the needed comfort to do so.

“The Reserve Bank’s recent round of household inflation expectations survey also points to some moderation in inflation expectations. Another factor favouring a cut at the current juncture is the risk of large over-supply of government bonds, which could push bond yields up,” according to the Minutes of the TAC meeting.

The recent announcement by the government to adjust interest rates on small savings on a quarterly basis and the proposed introduction of marginal cost of funds-based lending rate (MCLR) are expected to help monetary transmission, it added.

“Overall, given the likely improvement in monetary transmission, it is an opportune time to cut the repo rate by 25 bps, which would also be consistent with the Reserve Bank’s earlier forward guidance,” felt the two members. One of the members thought that there was room for more rate cuts since India’s natural rate of interest had fallen due to the global demand shock. Moreover, beneficial supply shocks combined with flexible inflation targeting would bring down inflationary expectations. The other member did not see much room for further cuts.

Two members recommended a repo rate cut of 50 basis points in the April policy. In addition to the above reasons, these members believed that despite pressures from the Pay Commission award, the government had budgeted for a fiscal deficit of 3.5 per cent of GDP. These developments, along with weak growth, weak investment and stressed balance sheets of public sector banks, made a case for a repo-rate cut at this juncture.

One of the two members, who recommended a rate reduction by 50 bps, wanted the rate cut to be followed by another rate cut of 25 bps in the June policy while the other wanted a pause. One member recommended status quo on policy rate. TAC has five external members — Shankar Acharya, Arvind Virmani, Errol D’Souza, Ashima Goyal, and Chetan Ghate. Besides the external members, Michael D Patra, BK Bhoi and DP Rath of the Reserve Bank, attended the meeting.

COMMENT NOW