Four of the five external members of the panel recommended a reduction in the policy repo rate
Reserve Bank of India Governor Raghuram Rajan seems to have heeded the predominant view of external members of the Technical Advisory Committee to cut the key policy rate in the first bi-monthly monetary policy for 2016-17.
Four of the five external members of the panel recommended a reduction in the policy repo rate.
Of these, two members preferred a reduction of 25 basis points, according to minutes of the TAC released by RBI.
RBI reduced the repo rate, the rate at which the regulator lends overnight money to banks, by 25 basis points to 6.5 per cent in its policy on April 5.
These two members felt more emphasis could be placed on growth concerns since the inflation outturn provided the needed comfort to do so.
The central 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 was the risk of large over-supply of government bonds, which could push bond yields up.
The government’s decision to adjust interest rates on small savings on a quarterly basis and introduction of a marginal cost of funds-based lending rate are expected to help monetary transmission, members felt.
Two members recommended bringing down the rate by 50 bps in the April policy.
In addition to the above reasons, they believed that despite pressures from the Pay Commission award, the government had budgeted a fiscal deficit of 3.5 per cent of gross domestic product.
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 wanted the rate cut to be followed by another rate cut of 25 bps in the June policy, while the other batted for a pause.
One member recommended status quo on policy rate.
According to this member, this was because core inflation had remained elevated, inflationary expectations had remained high and the price of oil had rebounded.
Plus, the fiscal consolidation numbers were not completely clear in terms of their contribution to aggregate demand.
The real policy rate was also neutral.
Image: Reserve Bank of India Governor Raghuram Rajan. Photograph: Reuters
