Majority RBI panellist want repo rate to be left unchanged

These Members suggested that the Reserve Bank may wait for at least one quarter to gauge the evolving macroeconomic situation

May 24, 2013 2:04 IST | India Infoline News Service
On monetary policy measures, three of the seven members of Technical Advisory Committee on Monetary Policy recommended a reduction in the policy repo rate by 25 basis points.

These members felt that while WPI inflation is declining, and inflation expectations have softened modestly; aggregate demand is weak, output growth is low and industry is underperforming.

Current macroeconomic environment requires a combination of tight fiscal policy and easy monetary policy. While the government has given a clear commitment on fiscal consolidation, monetary policy must ease. Moreover, in the current domestic and global growth and liquidity situation, a reduction in nominal interest rates will lead to exchange rate adjustments, greater competitiveness and reduction in CAD that is vital for stability in capital flows.

Two of these three members were also in favour of a CRR cut by 25 basis points to facilitate transmission of the rate cut to lending rates. The third Member suggested a cut in the statutory liquidity ratio (SLR). This, in combination with open market operations (OMOs), would improve liquidity and availability of credit to productive sectors.

The other four Members recommended that the policy repo rates be left unchanged. In their assessment, the global situation is weak, the fiscal situation does not provide much comfort and the CAD could remain on a high trajectory. Reducing the repo rate may not help revive growth, since low growth reflects impediments to investment projects through power/fuel/supply linkages.

Given the range of factors underlying the slowdown in growth and investment, investment at this stage may not be sensitive to interest rate changes. Moreover, even though the repo rate has been reduced by 100 basis points in 2012-13, lending rates have not gone down commensurately to activate investment. These Members suggested that the Reserve Bank may wait for at least one quarter to gauge the evolving macroeconomic situation.

The meeting was chaired by Dr. D. Subbarao, Governor. Other internal Members present were: Dr. Urjit R. Patel (Vice-Chairman), Dr. K.C. Chakrabarty, Anand Sinha and Harun R. Khan, Deputy Governors; and external Members present were: Y.H. Malegam, Prof. Indira Rajaraman, Dr. Shankar Acharya, Prof. Errol D’Souza, Prof. Ashima Goyal, Dr. Arvind Virmani and Dr. Chetan Ghate.

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