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The Reserve Bank today said majority of external members on its advisory panel were not in favour of easing interest rate, though it went ahead with a 0.25% cut while announcing 2013-14 annual monetary policy earlier this month.
The "four Members (of the total seven) recommended that the policy repo rates be left unchanged....(in their assessment) reducing the repo rate may not help revive growth, since low growth reflects impediments to investment projects through power/fuel/supply linkages," said minutes of meeting of the Technical Advisory Committee on Monetary Policy.
They suggested that the RBI may wait for at least one quarter to gauge the evolving macroeconomic situation.
The Committee had met in the run up to the annual Monetary Policy 2013-14 announced on May 3 in which the RBI reduced the repo rate by 0.25 basis points to 7.25%, amid demand of monetary policy easing.
However, three Members had recommended a reduction in the policy repo rate by 25 basis points and two also suggested cut in the cash reserve ratio (CRR) by a quarter percentage point.
The RBI said that in the assessment of members who favoured status-quo in policy rates, the global situation is weak, the fiscal situation does not provide much comfort and the CAD could remain on a high trajectory.
"Given the range of factors underlying the slowdown in growth and investment, investment at this stage may not be sensitive to interest rate changes," they felt.
They said that though the repo rate has been reduced by 100 basis points in 2012-13, lending rates have not gone down commensurately to activate investment.
External Members in the meeting were Y H Malegam, Indira Rajaraman, Shankar Acharya, Errol D'Souza, Ashima Goyal, Arvind Virmani and Chetan Ghate.
On the fiscal front, the external members felt that the high fiscal deficit continues to be a major concern.
Their opinion was that "although the government has made a firm commitment to fiscal consolidation, it is an election year and it may not be easy for the government to raise administered prices (of petroleum products) closer to the election".
Some Members, on the other hand, were of the opinion that the government may meet the target for the gross fiscal deficit to avoid a rating downgrade.
On the balance of payments (BoP), RBI said Members were of the view that with high oil and gold imports, the CAD to GDP ratio which touched historically high levels in 2012-13 may take some time to correct to a sustainable level of 2.5 to 3%.
They said the recent fall in global commodity prices has alleviated CAD risks to some extent.
In the period ahead, they felt, sudden change in global liquidity conditions cannot be ruled out and such a scenario may adversely affect the prospects of capital flows, and the financing of CAD may again turn out to be a major challenge.
On the domestic front, most Members were of the view that the overall demand situation is very weak, industrial growth is subdued, downgrading of companies by rating agencies has gone up by 30% and services sector is also weak.
They highlighted that profit margins of companies have been squeezed due to minimum wages rising with consequent wage pressures in the organized sector.
Members suggested that the RBI should give higher weightage to CPI based inflation rather than WPI as the headline inflation indicator, since the former is an indicator of consumption while the latter omits services.
The Reserve Bank should shift to CPI in a year or two from now, they suggested.
