Majority at RBI wanted rate cut at September review

Written by fe Bureau | Mumbai | Updated: Oct 23 2014, 07:32am hrs
Reserve Bank of India (RBI) governor Raghuram Rajan went against the majority opinion and kept interest rates on hold at the last bi-monthly monetary policy, minutes of the technical advisory committee showed.

The committee consists of the governor, four deputy governors and seven external members.

Four out of the seven external members of the committee had proposed a reduction in the repo rate, citing the stagnation in industrial demand, fall in inflation and positive real interest rates. One member suggested a sharper reduction of 50 bps and a guidance of no further rate cuts. The decrease in policy rate, according to this member, would not damage the inflation path since CPI inflation, excluding food and fuel, had come down and the Reserve Bank had already achieved what it wanted to do in the near term, the RBI minutes said.

Committee members viewed the current economic activity to be weak and saw a disconnect between corporate activity and buoyancy in capital market.

On inflation, the members were positive that household inflation expectations would drop as food prices correct. Retail inflation, excluding food and fuel prices, had also fallen, members noted. However, they warned that a backward-looking inflation expectations formation process can endanger the situation by making it inertial. Therefore, if the Reserve Banks inflation targets are not firmly believed by the public, anchoring inflation expectations will be difficult.

The RBI aims to bring retail inflation down to 6% by January 2016. The inflation rate has already fallen to 6.46% in September, data from the government showed.

The meeting was chaired by governor Rajan. Internal members included deputy governors Urjit Patel, HR Khan, R Gandhi and SS Mundra. External Members included YH Malegam, Arvind Virmani, academecians Shankar Acharya, Indira Rajaraman, Errol DSouza, Ashima Goyal, and Chetan Ghate.