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The Reserve Bank of India cut the repo rate last month despite four of the six external members of its monetary policy committee recommending that it should continue to pause.
The RBI cut the interest rate at which it lends money to banks to 8 per cent from 8.5 per cent in its Annual Policy Statement for 2012-13.
According to the minutes of the meeting of the Technical Advisory Committee on Monetary Policy, four members thought that unless the supply side constraints were addressed and relevant measures were taken to revive investment activity, the reduction in the policy rate would not have any impact.
Of the four members, one member suggested that the cash reserve ratio (CRR) be reduced by 50 basis points.
Another member was of the view that the CRR was already at a low level and that it should be used sparingly while the other two members did not suggest any change in the CRR.
The other two of the six external members suggested that the policy rate be reduced by 25 basis points. One of them also suggested a reduction in the CRR by 50 basis points.
External front
Most members were of the view that there was a need for heightened vigilance on the external front.
The high twin deficits (current account and fiscal) combined with persistently high inflation for about two years have made the economy more vulnerable to external shocks.
The members underscored that the RBI should assign more weight to preserving external stability.
The monetary policy should be more proactive in managing current account deficit (CAD) risks. In this context, some members felt that the reliance on short-term and debt-creating flows be avoided to finance the CAD.
Instead, the focus should be on bringing down the CAD to a sustainable level.
Members were of the view that in the presence of significant inflation differential between India and the rest of world and subdued capital inflows, the exchange rate should be allowed to depreciate.
members
The meeting of the Committee was chaired by Dr D. Subbarao, Governor. Other members present were Dr Subir Gokarn (Vice-Chairman), Dr K.C. Chakrabarty, Mr Anand Sinha, Mr H.R. Khan; and external members, Dr Shankar Acharya, Dr Rakesh Mohan, Prof Indira Rajaraman, Prof Sudipto Mundle, Prof Errol D'Souza and Prof Ashima Goyal.
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