Majority TAC members wanted rate cut by RBI

One member calls for rate cut of 50 basis points

 Majority of the members of the Reserve Bank of India’s (RBI) technical advisory committee (TAC) had recommended a rate cut by the central bank during its August meeting, with one of the members recommending a rate cut of 50 basis points.

“Four of the seven members recommended a reduction in the policy repo rate. Three of them suggested a reduction of 25 basis points. According to these members, firstly, headline inflation target for January 2016 will be comfortably met. Secondly, the domestic demand condition is weak and growth in bank credit, industrial production and exports are low,” RBI said.

“Thirdly, the fiscal situation is showing signs of improvement, with deficits coming down, and the composition of government expenditure shifting towards capex. Fourthly, the US Fed may raise rates later this year. Therefore, the members felt that the time is opportune to use the space that is available for a reduction in the policy repo rate,” RBI said.

The fourth member advocated a reduction in policy repo rate by 50 basis points as the real economy continues to be very weak, inflation risks are receding and both the fiscal and current account deficits are under control, RBI added.

Status quo

On the other hand, three of the members suggested a status quo on the policy repo rate.

According to them, firstly, with deceleration in credit growth, there is surplus liquidity in the markets as witnessed by the fact that the reverse repo operations are in excess of the repo operations and banks are holding significant excess investment in statutory liquidity ratio (SLR) securities.

The rates for collateralised borrowing and lending obligations have generally been lower than the policy repo rate and banks are sourcing funds largely from this window. The excess liquidity should, therefore, result in further reduction in deposit rates and consequently the cost of funds would decline followed by reduction in lending rates.

A reduction in repo rate at this stage may at best have a signaling effect but no real effect. Secondly, while both the inflation and IIP releases in July are unfavourable, progress of the monsoon over the July-August period will be crucial for the inflation outcome.

Since this data will not be available for the August review, the Reserve Bank should “wait-and-see” as the data evolve, and this would suggest a pause.

Thirdly, external conditions are such that the US economic activity is picking up, in the euro area, there are signs of growth improving in France and Germany, and even Japan is showing signs of a gradual recovery. Given the chance of the US Fed reversing its monetary policy stance early, it would be appropriate to keep the Indian stance on monetary policy unchanged.

One of the members recommended that the Reserve Bank should continue the policy of open market operations to mop up excess liquidity even at the risk of further increase in yields, while another members advocated a reduction in the SLR by 50 basis points, RBI added. RBI, in its third bi-monthly policy on August 5, had maintained a status quo on policy rates by keeping it unchanged at 7.25 per cent.