Notwithstanding risks to inflation from monsoon and oil prices, members felt that sharp reduction in inflation warrants a reduction in policy rate when consumption and external demand were weak
Mumbai : Reserve Bank of India Governor Raghuram Rajan went with the majority view of the Technical Advisory Committee (TAC), while deciding on 0.25 per cent cut in benchmark lending rate in its monetary policy earlier this month.
“All seven (TAC) Members have recommended a reduction in policy repo rate – four members advocated a cut by 25 basis points; two members suggested a 50 basis points reduction and one member proposed a reduction by 75 basis points,” RBI said while releasing summary of the consultation with TAC. One basis point is equal to one-hundredth of a percentage point or 0.01%.
Most of the members were of the view that notwithstanding risks to inflation from monsoon and oil prices, sharp reduction in inflation warrants a reduction in policy rate when consumption and external demand were weak and investment was showing a potential to revive, it said.
Consultation with external Members of the TAC was held electronically between May 20 and 22, in the run up to the Second Bi-monthly Monetary Policy Review, 2015-16 on June 2.
As per the consultation meeting, members highlighted conditions for further monetary accommodation including more transmission by banks, supply response from the government on food prices, and signs of US monetary policy normalising.
Members recommending a larger reduction in the policy repo rate were of the view that retail and wholesale inflation were benign, monsoon prospects improved, stability in oil prices, weak economic data and need to nudge the real effective exchange rate downwards a cut of 0.5 per cent in repo rate is desirable along with a possible announcement of a pause.
Some members also cited that many central banks have cut rates recently and policy rates in India are one of the highest in the world in comparison to its inflation. Members noted that the domestic economic activity was weak, while the initial optimism regarding growth and investment was waning.
On the external sector, Members expressed concern over subdued demand from across the globe and reflected in contraction in exports for a few months in a row despite depreciation of the rupee. There are seven external Members in the TAC. All of them — Y H Malegam, Shankar Acharya, Arvind Virmani, Indira Rajaraman, Errol D’Souza, Ashima Goyal, and Chetan Ghate — sent their feedback through e-mail.
