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
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.