Rajan went by majority opinion of advisors on RBI policy rate

RBI Governor Raghuram Rajan went by the majority suggestion of the central bank's external advisors to wait for signals from the Union Budget before reducing key interest rate, although three of the seven members were for a cut of 25-75 basis point.

In the 6th bi-monthly Monetary Policy Review announced on February 3, Rajan had kept the key policy (repo) rate unchanged at 7.75%. Rajan had however surprised markets by effecting a 25 basis point cut in January, ahead of the policy.

Four members on the Technical Advisory Committee (TAC) on monetary policy had recommended no change in the policy repo rate in the February review, RBI said in the summary of the "electronic consultation" with the TAC.

It said: "The members opined that there was no noticeable change in the environment since the policy rate action of mid-January 2015.

"Further action should be only after the Union Budget was presented so that there was clarity on measures proposed to increase potential output and on fiscal consolidation, which would anchor inflation expectations."

Finance Minister Arun Jaitley will present the Budget 2015-16 on Saturday. The next policy review of the Reserve Bank is on April 7.

On the other hand, three members had recommended that the policy rate be reduced on February 3.

"Two members suggested a reduction by 25 basis points. According to these Members, the trend reduction in inflation and inflation expectations has been in excess of the glide path," RBI said.

One member recommended a sharp reduction of 75 basis points in the policy rate "as the economy is stagnating and is in urgent need of a monetary policy push".

On the domestic front, members noted that while there was improvement in the economic situation with a revival in the service sector growth and better corporate results, industrial performance, particularly consumer durables and manufacturing, continued to be weak.

Also, the service sector growth was expected to slow as the government cuts plan expenditure to meet fiscal deficit targets.

A member noted that the new GDP series may alter the GDP absolutes as also the growth rates in recent quarters while adding that "the current indications were that the economy is stagnating".

All the seven external members - Y H Malegam, Shankar Acharya, Arvind Virmani, Indira Rajaraman, Errol D'Souza, Ashima Goyal, and Chetan Ghate - sent their feedback through e-mail.

RBI had constituted TAC to strengthen the consultative process in monetary policy.