By cutting the policy repo rate on June 2, Reserve Bank of India Governor Raghuram Rajan went along with the unanimous recommendation made by members of the Technical Advisory Committee (TAC) on Monetary Policy in this regard.

In RBI’s consultation with external members of the TAC between May 20 and May 22, all seven members recommended a reduction in policy repo rate – four members advocated a cut by 25 basis points; two members suggested a 50 basis points reduction and one member proposed a reduction by 75 basis points.

In its second bi-monthly monetary policy statement, the RBI cut the policy repo rate (the interest rate at which it lends short-term money to banks) from 7.50 per cent to 7.25 per cent.

The members who recommended a 25 basis points reduction in the policy repo rate were of the view that notwithstanding risks to inflation from monsoon and oil prices, sharp reduction in inflation warrants a reduction in policy rate when consumption and external demand were weak and investment was showing a potential to revive. With low inflation readings and its likely impact on inflation expectations that are adaptive, there is some monetary space to support the growth process, the members said. One of these members also recommended that the statutory liquidity ratio (SLR) should also be reduced by 50 basis points.

Economic scenario The members who recommended larger reduction in the policy repo rate were of the view that with the continuing benign trends in retail and wholesale inflation, improved prospects of monsoon, oil prices at a sustainable level from which they are unlikely to rise further, weak data on economic activity, and the need to nudge the real effective exchange rate downwards, a 50 bps reduction in repo and reverse repo rates is desirable along with a possible announcement of a pause.