Reserve Bank Governor Raghuram Rajan went against the majority view of external Members of the Technical Advisory Committee (TAC) and kept the interest rate unchanged in the monetary policy review early this month.
Four out of seven members of the committee (TAC) suggested a cut in the repo rate in view of subdued inflation and need to boost growth. Of these four members, three suggested 0.25 per cent cut in benchmark lending rate or the repo rate, while one made a case for 0.50 per cent cut in short-term lending rate.
"Four of the seven members recommended a reduction in the policy repo rate. Three of them suggested a reduction of 25 basis points. ...the members felt that the time is opportune to use the space that is available for a reduction in the policy repo rate," according to a summary of consultation with the TAC released by RBI on Tuesday.
The Technical Advisory Committee on Monetary Policy has seven external experts as Members, among others. The external Members are Y H Malegam, Shankar Acharya, Arvind Virmani, Indira Rajaraman, Errol D'Souza, Ashima Goyal, and Chetan Ghate.
The RBI held consultation with external Members of the TAC between July 22-28 in the run up to the Third Bi-monthly Monetary Policy Review, 2015-16 on August 4, 2015.
One external Member advocated for a reduction of 0.50 per cent in short-term lending rate arguing that the real economy continues to be very weak, inflation risks are receding and both the fiscal and current account deficits are under control.
On the other hand, three Members recommended a status quo in the policy repo rate. They said a reduction in repo rate at this stage may at best have a signaling effect but no real effect and suggested RBI to "wait-and-see".
In its policy meet earlier this month, RBI kept interest rates unchanged, citing spike in food prices and banks passing on to consumers only less than half of its previous rate cuts.
The RBI Governor has veto power over the TAC members and outside appointees.
A controversy recently broke out after a revised draft paper of the Indian Financial Code (IFC) last month suggested a seven-member monetary policy committee with a majority of government-appointed members and doing away with the veto power to the RBI chief.
It was proposed that the committee would take decisions by a majority vote.
Rajan, however, has favoured dropping the veto power.