Repo decision: RBI went by majority view in advisory panel

After cutting repo rate by 25 bps to 7.75% on Jan 15, RBI maintained status quo on policy rates in review on Feb 3

By keeping key interest rates on hold in the latest monetary policy review, Reserve Bank of India Governor Raghuram Rajan seems to have gone by the majority view among external members of the central bank's Technical Advisory Committee (TAC).

However, when it came to a decision on the Statutory Liquidity Ratio (SLR), Rajan heeded a lone voice in the TAC to cut it by 50 basis points (bps), to 21.5 per cent. After cutting the repo rate (at which it lends to banks) by 25 bps to 7.75 per cent on January 15, RBI maintained status quo on policy rates in the review on February 3. It has issued the main points from the consultation with TAC external members. On policy action, four of the seven external members recommended no change in the repo. They opined there was no noticeable change in the environment since the action of mid-January. Further action should be only after the Union Budget had been presented, so that there was clarity on the measures proposed to raise growth and on fiscal consolidation, they said.

Three members advised a a rate cut. Two of them advised one of 25 bps and one sought a sharp 75 bps reduction. These members said the trend reduction in inflation and inflation expectations had been in excess of the glide path. Therefore, a reduction was necessary before pausing to watch food inflation. Also, as lower credit growth was not compensated by increased issuance of commercial paper, it has been suggested that credit is being priced too high in relation to its supply. The economy is stagnating and in urgent need of a monetary policy push.

One recommended the SLR be cut by 50 bps and another recommended a 100 bps reduction.  Some expressed concern over large-scale foreign portfolio investment into India and the consequent build-up of short-term debt. Quantitative easing by the European Central Bank could further push capital flows to India. They felt RBI should continue to build reserves. The consequent expansion of domestic liquidity would help in the monetary policy stance, too.

The European QE, in conjunction with the likely normalisation in US monetary policy by June, might lead to high volatility in the financial markets. This could spill over to the foreign exchange market, with consequent volatility in the exchange rate, they said.