RBI went with majority in cutting interest rate earlier this month

The repo rate was cut by 25 basis points to 7.25% on june 2

Reserve Bank of India (RBI) Governor Raghuram Rajan had gone with the majority of the technical advisory committee (TAC) on monetary policy when the rate cut was done in the second bi-monthly monetary policy review on June 2. The repo rate or the rate at which banks borrow from the central bank was cut by 25 basis points (bps) to 7.25 per cent.

TAC typically meets a week before the policy announcement, while the minutes of the meeting are released with a three-four week lag.

“All seven members have recommended a reduction in policy repo rate — four members advocated a cut by 25 basis point; two members suggested a 50 basis points reduction and one member proposed a reduction by 75 basis points,” the minutes said.

The members who had recommended a reduction in the policy repo rate by 25 bps were of the view that notwithstanding risks to inflation from monsoon and oil prices, sharp reduction in inflation warranted a reduction in policy rate when consumption and external demand were weak and investment was showing a potential to revive.

Members noted that RBI's monetary policy review in April highlighted a set of conditions for further monetary accommodation — more transmission by banks, supply response from the government on food prices, and signs of US monetary policy normalising.

Since the evidence on these was mixed, a wait-and-see approach was warranted. However, with low inflation readings and its likely impact on inflation expectations that were adaptive, there was some monetary space to support the growth process.

Since the start of 2015, RBI has cut the repo rate by 75 bps so far.

Members who recommended a 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 were unlikely to rise further, weak data on economic activity, and the need to nudge the real effective exchange rate downwards, a 50-basis point reduction in repo and reverse repo rates was desirable along with a possible announcement of a pause.

Some of these members were of the view that many central banks had cut rates recently and policy rates in India were one of the highest in the world in comparison to its inflation.

On the external sector, members expressed concern over subdued demand from across the globe and reflected in contraction in exports for a few months in a row despite depreciation of the rupee.

Members noted that domestic economic activity was weak and the initial optimism regarding growth and investment was waning.