Reserve Bank Governor Raghuram Rajan went with the majority view of external members on the Technical Advisory Committee (TAC) on the policy rate to announce the rate cut.
“On policy options, six members recommended reduction in the policy repo rate – two suggesting a reduction of 50 basis points (bps), one being flexible within the range of 25 to 50 bps, while three wanted to move cautiously with a reduction of 25 bps,” showed the minutes, which were released today.
The fourth-bimonthly monetary policy for the current fiscal was announced on September 29.
With a view to strengthen the consultative process in monetary policy, the RBI had constituted TAC on Monetary Policy in June 2009.
The three members who recommended a reduction of the policy rate greater than 25 bps were of the view that during the pre-crisis period, corporate performance was the key driver of growth and going forward, recovery of the industrial sector would be critical for achieving a growth rate of 8.5 per cent, the minutes showed.
“However, the growth of industrial production is tepid at present, real interest rates faced by the corporates have increased sharply and the rise in the real interest rate has more than offset the positive effects of the decline in commodity prices,” they opined.
Moreover, “there has been comfort on the inflation front” GDP consumption deflator has been low at around 3 per cent, and with vendors engaged in e-commerce offering low prices, retail inflation may be lower than what the headline number suggests.
“Therefore, a large rate cut at this juncture is warranted to take the economy out from the present drag,” the members felt.
The minutes further said three members suggested a reduction of 25 basis points would be a timely response avoiding falling behind the curve, signalling continuation of easy monetary policy and helping banks cut lending rates.
One of these members also recommended forward guidance to discuss risks to the medium-term growth and inflation estimates and suggested a reduction in the statutory liquidity ratio (SLR) by 50 basis points.
One member recommended that the policy repo rate be kept unchanged. The member was of the view that the RBI needs to be careful and should keep stressing on data dependency to avoid getting into a Fed-like trap.
The meeting was chaired by Rajan, while external members — Y H Malegam, Shankar Acharya, Arvind Virmani, Indira Rajaraman, Errol D’Souza, Ashima Goyal and Chetan Ghate — were also present.
The minutes further said that members saw no visible signs of recovery in growth domestically. The buoyancy in tax collections was influenced by additional resource mobilisation measures taken by the government, including increases in excise, cess and service tax rather than a durable pick-up in economic activity.
With the marginal increase in net sown area and resilience in allied activities, prospects of revival in agriculture are visible, which may lead to a consumption-led recovery.
While industrial production is expected to revive gradually, limited signs of fresh capital expenditure, as reflected in a large decline in new project announcements, is a major concern.
Some members felt that the fiscal deficit target is difficult to achieve, given expenditure pressures from the implementation of one-rank-one-pension, the impending seventh pay commission award, the weak disinvestment situation, special assistance given to some states, and slower domestic growth.
The widening of the current account deficit in the context of sluggish investment activity is also of concern. Some Members believed that the government should stick to the fiscal deficit target – even at the cost of low investment – to get credibility built into the system.