All Seven members of the Reserve Bank of India’s Technical Advisory Committee on Monetary Policy recommended the RBI to cut interest rates at its June 2 review, with most recommending the 25 basis points cut that was announced by Governor Raghuram Rajan.
According to minutes released by the RBI on Tuesday, four members had called for a 25 bps rate cut ahead of that review, saying sharply easing inflation allowed the central bank to focus on supporting the domestic economy. “All seven 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,” the RBI said.
The members who had recommended a reduction in the policy repo rate by 25 basis points 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.
Members noted that the monetary policy review in April by the Reserve bank highlighted a set of conditions for further monetary accommodation — more transmission by banks, supply response from the government on food prices, and signs of US monetary policy normalizing.
Since the evidence on these is mixed, a wait-and-see approach was warranted. However, with low inflation readings and its likely impact on inflation expectations that are adaptive, there is some monetary space to support the growth process. One of the members also recommended that the SLR should also be reduced by 50 basis points.
The members who recommended larger reduction in the policy repo rate were of the view that with the continuing benign trends in retail and wholesale inflation, improved prospects of monsoon, oil prices at a sustainable level from which they are unlikely to rise further, weak data on economic activity, and the need to nudge the real effective exchange rate downwards, a 50 bps reduction in repo and reverse repo rates is desirable along with a possible announcement of a pause, the RBI said.
Some of these Members were of the view 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. “This invites carry from arbitrage seeking inflows that reverse during global risk-off, creating volatility.