The Reserve Bank of India Governor D. Subbarao adopted the unanimous recommendation of all external members of the monetary policy panel while reducing the repo rate last month, according to the minutes of the panel’s meeting.
All members of the technical advisory committee were unanimous in recommending a reduction in the policy repo rate at the meeting held on January 23. Four of the six members suggested that the RBI should reduce the repo rate by 25 basis points. A basis point is equal to one-hundredth of a percentage point.
The members felt that favourable global conditions as well as marginal decline in the Wholesale Price Index (WPI)-based inflation provided room for some monetary easing. This would also support the reform initiatives implemented by the Government.
In the last meeting the advisory panel held on monetary policy in October last year , though a majority of the external (five out of six) members recommended a repo rate cut to revive investment, the central bank only cut the cash reserve ratio (CRR) from 4.50 to 4.25 per cent.
Repo rate is the interest rate at which banks borrow short-term funds from the RBI. CRR is the slice of deposits that banks have to park with the RBI.
In the third quarter review of the monetary policy on January 29, the RBI cut the repo rate from 8 per cent to 7.75 per cent and the CRR from 4.25 per cent to 4 per cent.
The members, however, felt that lack of fiscal discipline will tie the RBI’s hands in sustaining its efforts to support growth through policy easing.
Two of the external members felt that a 25-basis point reduction in the repo rate alone may not induce banks to reduce lending rates. A 25 basis points cut in the CRR is also needed to nudge down lending rates. This would also enable lending rates to fall more than the rates on deposits.
One of the other two members felt that the RBI should make use of open market operations (OMOs) to manage liquidity and keep the CRR unchanged.
On the fiscal front, some of the panel members felt that Government expenditure was flabby and despite recent efforts, there was still an overwhelming likelihood that the fiscal deficit would be at a minimum of 5.5 per cent of GDP, when the actual numbers came out.
The Consumer Price Index-based inflation is already carrying some cost of fiscal correction since the base of the service tax has been substantially increased. According to some Members’ assessment, the rate of inflation in 2013-14 could be only marginally lower than in 2012-13.