RBI's Jan 29 rate cut was in line with experts' views
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Rate cut was in line with experts' views

The Reserve Bank of India's decision to cut interest rates in the third quarter monetary policy review was in tune with the unanimous opinion of external experts in this regard.

 PTI   
  • Mumbai,  February 24, 2013  
  • |  
  • UPDATED   12:16 IST

The Reserve Bank of India's decision to cut interest rates in the third quarter monetary policy review was in tune with the unanimous opinion of external experts in this regard.

In its third quarter monetary policy review on January 29, the RBI had reduced the key rate (repo rate) by 0.25 per cent after maintaining a status quo on it since April 2012.

External members Y H Malegam, Indira Rajaraman, Sudipto Mundle and Shankar Acharya attended the meeting chaired by RBI Governor D Subbarao. Two external members Errol D'Souza and Ashima Goyal, who could not attend the meeting, submitted their written views.

On monetary policy measures, all external members were unanimous in recommending a reduction in the policy repo rate, according to the minutes of the Technical Advisory Committee (TAC) held on January 23, six days before the policy review.

Four of the six members, the minutes said, had suggested that the reduction should be by 25 basis points as they felt favourable global conditions as well as marginal decline in WPI inflation provided room for some monetary easing.

The other two members had pitched for a sharper cut of 0.50 per cent in the repo rate (short-term lending rate) as they felt it would increase working capital loans, thereby increasing capacity utilisation.

The members felt that the huge level of current account deficit (CAD), which reached a historic high in second quarter of 2012-13, was the "most important macroeconomic concern". Financing such high levels of CAD is worrisome, as it is accentuating external sector vulnerability, they said.

On gold imports, they felt "once inflation subsides and growth improves, people will have less incentive for flight to safe haven assets".

Further, the members opined that "the underlying macroeconomic conditions are still sluggish. Investment has not revived yet and contraction is still underway in the capital goods industries".

They were of the view that there has been an improvement in sentiment since the government initiated measures to attract FDI and for fiscal consolidation. Also, setting up of the Cabinet Committee on Investment to fast-track delayed projects was also a welcome step, they opined.

They felt that in 2013-14, if there are no major shocks and the budget perseveres with fiscal consolidation measures, investor confidence may improve further and concomitantly investment could pick up.

On the fiscal front, members thought that the fiscal situation is still very difficult. However, the recent fiscal consolidation efforts should be taken as significant efforts.