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Business News/ Industry / Banking/  Majority of RBI advisors backed interest rate cut in September meeting
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Majority of RBI advisors backed interest rate cut in September meeting

The 4 members in favour of lower interest rates recommended a rate cut of at least 25 basis points

The RBI kept its policy rate unchanged at 8% in the monetary policy, citing upside risks to its objective of bringing inflation below 6% by January 2016. Photo: Pradeep Gaur/MintPremium
The RBI kept its policy rate unchanged at 8% in the monetary policy, citing upside risks to its objective of bringing inflation below 6% by January 2016. Photo: Pradeep Gaur/Mint

Mumbai: Four out of seven external members of the Reserve Bank of India’s (RBI) technical advisory committee (TAC) on monetary policy had advocated a rate cut in RBI’s fourth bi-monthly monetary policy on 30 September, edited minutes of the committee meeting held on 24 September showed.

The meeting was chaired by RBI governor Raghuram Rajan and attended by other RBI senior officials besides external members such as Y.H. Malegam, Shankar Acharya, Arvind Virmani, Indira Rajaraman, Errol D’Souza, Ashima Goyal and Chetan Ghate.

The four members in favour of lower rates recommended a rate cut of at least 25 basis points.

The RBI, however, kept its policy rate unchanged at 8% in the monetary policy, citing upside risks to its objective of bringing inflation below 6% by January 2016.

The TAC is an advisory committee and the RBI governor is under no obligation to accept suggestions given by its members. Support for a cut in interest rates has built up in the past few months as inflation eased. Inflation based on the consumer price index fell to 6.5% in September, while wholesale inflation fell to a five-year low of 2.4%. Since then, the government has linked diesel prices to market rates, which reduced price of the fuel by more than Rs3 a litre. This is likely to further bring down inflation in the short term.

RBI’s advisors who were in favour of a rate cut cited stagnating industrial demand and decline in inflation leading to positive real interest rates.

“Positive real rates were required by the Reserve Bank to meet its 6% (CPI inflation) target by January 2016. If inflation reduces further, the real policy rate will keep on increasing," which should merit a rate cut the RBI minutes disclosed.

One member also suggested a rate cut of 50 basis points, “with an emphatic forward guidance that there will be no further follow-up of the rate cut."

According to this member, “the decrease in policy rate 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 minutes showed.

Three of the seven external members recommended no change in the policy repo rate even as they acknowledged that with a weak domestic and world economy, moderating inflation, oil prices trending downwards, commodity prices past their super cycle, there was a case for easing policy rates and helping growth.

They were of the view that if the pace of disinflation is faster than what is anticipated now, and if inflation expectations soften, then a rate cut can be considered and not immediately.

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Published: 22 Oct 2014, 07:45 PM IST
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