Majority external committee members of RBI favoured a rate cut in April

A majority of the seven voting members of the Technical Advisory Committee (TAC) of RBI favoured a rate cut in the first bi-monthly policy review of the new fiscal early this month, in which the monetary authority decided to hold on to the current rate, minutes of the meeting shows.

The TAC comprises of seven external members (who vote on policy matters) besides five top RBI functionaries including the governor who chairs the meeting.

Four of the seven voting members called for a rate cut while three preferred a status quo on April 1 committee meeting. The final call on the monetary policy is taken by RBI itself and is announced every two months. RBI decided to hold on the 7.5 per cent repo rate on April 7.

Of the four members who voted for a rate cut, two recommended a 50 bps rate cut while the other two maintained that a rate cut of 25 bps would be sufficient given the uncertainties regarding path of the fiscal deficit, the monsoon, and the way the US Fed will announce increases in its policy rate.

The three members who wanted a status quo said they want to see the lower rates get passed on to borrowers before seeing through a 25 bps rate cut in repo rate.

They emphasised that simultaneous monetary and fiscal easing was a major risk and found the recommendation of some members to front-load cuts rather puzzling.

TAC was first constituted in July 1999 to get feedback from market participants, academia, government, other financial sector regulators, stock exchanges, market representative bodies etc. TAC usually meets a week before the RBI policy review, while the minutes are released with a four week lag.

TAC is soon to be replaced by monetary policy committee (MPC) as RBI and the government align India's monetary policy with that of the developed nations. While TAC is just an advisory body, the recommendations of which are not binding on the RBI, in a MPC framework the governor would be held accountable and would have to explain his decision of over-riding the decision of MPC.

The Indian government and RBI agreed on a monetary policy framework that will make managing consumer inflation the key determinant in the central bank’s policy decisions earlier this year. Under the new framework central bank would be expected to keep inflation within the 4 per cent target with range of +/- 2 per cent.

RBI is scheduled to meet next on June 2, 2015. It is now widely expected to cut rates by 25 bps.

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