As many as six out of seven external members of the Reserve Bank of India (RBI)’s technical advisory committee recommended the central bank cut the key repo rate at its policy review on September 29, the RBI said in its minutes released on Wednesday.
Out of six members who recommended reduction in the policy repo rate, two members suggested a straight reduction of 50 basis points (bps) and one member argued for 25 to 50 bps, while three wanted to move cautiously with a reduction of 25 bps. However, RBI Governor Raghuram Rajan surprised everyone with a 50 bps cut in repo rate to 6.7 per cent.
The external members of the panel, chaired by Rajan, included YH Malegam, Shankar Acharya, Arvind Virmani, Indira Rajaraman, Errol D’ Souza, Ashima Goyal and Chetan Ghate.
According to the RBI, the three members who recommended a reduction of the policy rate greater than 25 bps were of the view that during the pre-crisis period, corporate performance was the key driver of growth and going forward, recovery of the industrial sector would be critical for achieving a growth rate of 8.5 per cent. However, the growth of industrial production is tepid at present, real interest rates faced by the corporates have increased sharply and the rise in the real interest rate has more than offset the positive effects of the decline in commodity prices.
Moreover, there has been comfort on the inflation front – wholesale prices are contracting, GDP consumption deflator has been low at around 3 per cent, and with vendors engaged in e-commerce offering low prices, retail inflation may be lower than what the headline number suggests. “Therefore, a large rate cut at this juncture is warranted to take the economy out from the present drag,” they said.
“Three members suggested that a reduction of repo rate by 25 basis points would be a timely response avoiding falling behind the curve, signalling continuation of easy monetary policy and helping banks cut lending rates. With the policy repo rate of 7 per cent (after a reduction by 25 basis points) and inflation at 5.5 per cent, the policy rate will still be neutral, given estimates of the neutral rate between 1.5 per cent and 2 per cent,” the RBI said. One of these members also recommended forward guidance to discuss risks to the medium term growth and inflation estimates and suggested a reduction in the statutory liquidity ratio (SLR) by 50 basis points.
The RBI said one member recommended that the policy repo rate be kept unchanged. Although growth was slowing, CPI inflation would be around 6 per cent by March 2016 and there could be an upside pressure on bond yields if outflows become large. At such a juncture, the member preferred to wait. and watch the unfolding developments rather than going for a rate cut.