The Reserve Bank of India governor Raghuram Rajan went against majority vote and kept policy rates unchanged in the monetary policy on August 4, a summary of the electronic consultation with the technical advisory committee members showed.
Rajan sided with the three minority votes against seven external members to keep the repo rate unchanged at 7.50% on the view that previous rate cuts still need to be transmitted to the economy. Further, members supporting no cut in policy rates had pointed out to excess liquidity in the banking system which may result in reduction in deposit rates and, therefore, lending rates further. Members also pointed to risks from monsoon and the imminent decision on rate hike by the US Federal Reserve. “One of these members recommended that the RBI should continue the policy of open market operations to mop up excess liquidity even at the risk of further increase in yields,” the release of the central bank said.
Four external members had voted for a cut in repo rate and out of them, three had recommended a 25 basis points cut. These members noted the weak domestic demand, low growth in bank credit offtake, industrial output and exports. “The Members felt that the time is opportune to use the space that is available for a reduction in the policy repo rate,” the release said. The fourth Member advocated a reduction in policy repo rate by 50 basis points as the real economy continues to be very weak, inflation risks are receding and both the fiscal and current account deficits are under control.
Regarding inflation, some Members were of the view that with the revival of monsoon in late July and reduction in rainfall deficit to 5%, food prices may remain soft, keeping prospects of a sustained uptick in CPI inflation low.
External members of the committee include former deputy governor Y.H. Malegam, academicians Shankar Acharya, Arvind Virmani, Indira Rajaraman, Errol D’Souza, Ashima Goyal, and Chetan Ghate.