RBI Governor Raghuram Rajan went the majority view of the external advisory body on monetary policy to slash the key interest rate early this month, according to the minutes of the meeting released today.
Releasing the Minutes of Meeting of the Technical Advisory Committee on Monetary Policy, RBI said four of the five external Members recommended a reduction in the repo rate.
"Of these, two members suggested a reduction of 25 basis points... Two members recommended a repo rate cut of 50 basis points in the April policy," the minutes said.
In the first bi-monthly monetary policy review for 2016-17 announced on April 5, Rajan reduced the key interest rate by 0.25 per cent and introduced a host of measures to smoothen liquidity supply.
The two members who suggested a 25 basis points cut in the rate were of the view that more emphasis should be placed on growth concerns since the inflation outturn provides the needed comfort to do so.
"Overall, given the likely improvement in monetary transmission, it is an opportune time to cut the repo rate by 25 bps, which would also be consistent with Reserve Bank's earlier forward guidance," the members opined.
One of these members thought there was room for more rate cuts since India's natural rate of interest had fallen due to the global demand shock.
Those who wanted a 50 bps cut believed despite pressures from the pay commission award, the government had budgeted a fiscal deficit of 3.5 per cent of GDP.
"These developments, along with weak growth, weak investment and stressed balance sheets of public sector banks, made a case for a repo rate cut at this juncture," said members as per the minutes.
One member recommended status quo on policy rate.
"According to this member, core inflation remain elevated, inflationary expectations remain high, the price of oil has rebounded, and the fiscal consolidation numbers were not completely clear in terms of their contribution to aggregate demand," the Minutes said.
The five external members are: Shankar Acharya, Arvind Virmani, Errol D'Souza, Ashima Goyal and Chetan Ghate.
With a view to strengthen the consultative process in monetary policy, the RBI had constituted TAC on Monetary Policy in June 2009.
The minutes further said the members noted that the
softening in retail inflation in February 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.
"However, going forward, there are risks to the inflation path with inertial inflation in CPI excluding food and fuel and elevated level of services inflation. The disinflationary pass-through from low crude oil prices will also be offset by the recent nominal depreciation of the rupee, coupled with possible future increases in excise duties," was their view.
On domestic growth, Members were of the view that notwithstanding deceleration of activity in the recent period, GDP growth is still strong.
However, industrial growth is low largely due to manufacturing which, in turn, is driven by weakness in the capital goods sector. Two sectors - agriculture/rural and listed corporate - have seen noticeably slower growth.
Also, divergence between the value added indicator (GVA) and the volume indicator (IIP) suggests that falling commodity prices has not led to a decline in profits.
They also highlighted that global risks were worrying as global growth is slowing.
On the external sector, implication of global developments is that recovery in the globalised corporate sector will be slow, they said and added weak corporate sector and slowing remittances are concerns that monetary policy needs to take into account.
