Mumbai: Reserve Bank of India (RBI) governor D. Subbarao went with the view of the majority external members when he announced a 25 basis points (bps) cut in the repo rate in the third quarter policy review last month.
Minutes of the technical advisory committee (TAC) meeting held on 23 January, six days before the policy was announced, showed that all external members on the committee were unanimous in recommending a cut in repo rate. While four of the members wanted a 25 bps cut, two members were in support of a steeper 50 bps cut, a RBI release said.
One basis point is one-hundredth of a percentage point.
RBI cut in its benchmark bank lending repo rate by 25 bps to 7.75% on 29 January in an attempt to revive investments and reverse the free fall in economic growth. It had also cut the cash reserve ratio (CRR), or the amount of money banks keep with the central bank for no interest, by 25 bps to 4%.
The four external members who recommended a 25 bps repo rate cut “felt that favourable global conditions as well as marginal decline in WPI inflation provide room for some monetary easing. This would also support the reform initiatives implemented by the government”, RBI said in the release.
Two of the four members who had asked for a 25 bps cut in the repo rate also wanted a 25 bps cut in CRR because they felt that a repo cut on its own “may not induce banks to reduce their lending rates and a cut in the CRR of 25 basis points to nudge the lending rates down is in order. This would also enable loan rates to reduce more than deposit rates”.
The two other members who recommended a sharper, 50 bps, cut in the repo rate said that the so-called open market operations (OMOs), through which RBI buys government bonds, will be a better tool to manage liquidity rather than a CRR cut. One of these two members was “indifferent” between a 50 bps cut in January and equal spilt of 25 bps between January and after the 28 February budget “if it envisages credible consolidation and keeps the fiscal deficit contained to less than 5% of GDP in 2013-14. (As) In this scenario, there could be some post-budget expectations for monetary policy to reinforce the impact of fiscal consolidation.”
The meeting was chaired by Subbarao. While external members included Y.H. Malegam, Indira Rajaraman, Sudipto Mundle and Shankar Acharya. Two members, Errol D’Souza and Ashima Goyal, could not attend the meeting and submitted their written views.
All four RBI deputy governors and executive directors Deepak Mohanty, Michael Patra and B.K. Bhoi attended the meeting.