Majority of RBI advisors advocated rate cut in August policy

Four of the seven members of the technical advisory committee on monetary policy had suggested further reduction in interest rate before the third bi-monthly monetary policy was announced on August 4. However, the Reserve Bank of India (RBI) decided to keep the rates unchanged.

The technical advisory committee, which meets before the policy is announced, gives its feedback to RBI. The minutes of the meetings are released in public domain with a lag of three or four weeks.

The central bank, which had reduced the repo rate, or the key policy rate, thrice, by a total of 75 basis points (bps) between January and June, decided to keep the rates unchanged in August as it cited sustained hardening of core retail inflation, excluding food and fuel.

In addition, some food prices, particularly of protein-rich items, pulses and oilseeds, have risen sharply in recent months. Banks are yet to pass the entire rate reduction by RBI, as base rates have only come down by 25-30 bps.

Three of the four members who advocated a rate cut said the repo rate should be lowered by 25 bps as they felt the six per cent headline inflation target for January 2016 would be comfortably met.

Consumer price index-based inflation rose to an eight-month high in June, to 5.4 per cent though it came down sharply in July to 3.78 per cent. The July inflation figures were released a week after the policy review.

The members who wanted a rate reduction also said domestic demand condition was weak and growth in bank credit, industrial production and exports was low.

These members also said the fiscal situation was showing signs of improvement, with deficits coming down and the composition of government expenditure shifting towards capital expenditure.

One member suggested a rate cut of 50 bps, saying the real economy continued to be weak, inflation risks were receding, and both the fiscal and current account deficits were under control.

Three members suggested RBI adopt a ‘wait and see’ approach, as the progress of the monsoon over the July-August period would be crucial for the inflation outcome and this data would not be available for the August review.

These members also said since there was already a surplus liquidity in the banking system, which resulted in softening of overnight rates, a reduction in repo rate at this stage might at best have a ‘signalling effect but no real effect’. They also highlighted the rise in inflation in July.

One member recommended  RBI continue the policy of open market operations to mop up excess liquidity even at the risk of further increase in yields. Another member advocated a reduction in the statutory liquidity ratio by 50 bps.

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