Ra­jan Went by Ma­jor­ity View on April Rate Cut

In­fla­tion read­ing along ex­pected lines, sta­ble food prices, risk of large over-sup­ply of govt bonds were the favour­ing fac­tors

The Economic Times - - Economy: Micro, Macro & More - Our Bureau

Mum­bai: The Re­serve Bank Gover­nor Raghu­ram Ra­jan chose to go by ma­jor­ity ad­vice of his ex­ter­nal ad­vi­sors in the last mone­tary pol­icy in April when he low­ered pol­icy rates by 25 ba­sis points to 6.5% as in­fla­tion was eas­ing and ris­ing global eco­nomic risks. While four of the five mem­bers in the Tech­ni­cal Ad­vi­sory Com­mit­tee rec­om­mended a rate re­duc­tion, two were pitching for as much as half a point cut as the gov­ern­ment stuck to the fis­cal deficit tar­get of 3.5% of the gross do­mes­tic prod­uct, RBI said in a state­ment.

“The soften­ing in re­tail in­fla­tion in Fe­bru­ary 2016 was largely driven by lower food in­fla­tion as veg­etable prices de­clined and ce­re­als in­fla­tion re­ceded be­low the in­crease in the min­i­mum sup­port price, even while pulses in­fla­tion re­mained el­e­vated,” RBI said at­tribut­ing it to mem­bers of the TAC. “How­ever, go­ing for­ward, there are risks to the in­fla­tion path with in­er­tial in­fla­tion in CPI ex­clud­ing food and fuel and el­eva- ted level of ser­vices in­fla­tion.”

RBI in April re­duced the bench­mark bor­row­ing rates by a quar­ter point af­ter the gov­ern­ment stuck to its fis­cal deficit tar­get de­spite lob­by­ing to re­lax it to boost in­vest­ments. Fur­ther­more, in­fla- tion read­ing has been along ex­pected lines due to low crude oil prices and even food prices didn’t wit­ness the spike.

An­other fac­tor favour­ing a rate cut was the risk of large over­sup­ply of gov­ern­ment bonds, which could push up bond yields. The gov­ern­ment’s de­ci­sion to ad­just in­ter­est rates on small sav­ings on a quar­terly ba­sis and the pro­posed in­tro­duc­tion of mar­ginal cost of funds-based lend­ing rate (MCLR) are ex­pected to help mone­tary trans­mis­sion.

Mem­bers also de­bated the tight liq­uid­ity con­di­tions and one mem­ber sug­gested that there should be a re­duc­tion in the Cash Re­serve Ra­tio, the pro­por­tion of de­posits that banks keep with the RBI, to boost liq­uid­ity which may have also been due to the gov­ern­ment’s crack­down on black money.

“Re­duc­ing the CRR (cash re­serve ra­tio) may be a so­lu­tion,” RBI said in a state­ment. “Al­though this may not be a durable so­lu­tion it by­passes the need to con­duct OMOs and dis­tort the yield curve. The dis­ad­van­tage of us­ing the CRR, how­ever, is that it is usu­ally a one-time ad­just­ment.”

PTI RBI Gover­nor Raghu­ram Ra­jan on his ar­rival in Bhopal on Thurs­day.

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