Subbarao endorsed advisors on policy rate cut

D Subbarao

Reserve bank of India governor Duvvuri Subbarao endorsed the unanimous recommendation of all external members of the bank to cut its policy interest rate last month the first cut in 9 months minutes of the quarterly meeting released on Saturday showed.

Four of the six members suggested that the Reserve Bank of India (RBI) should reduce the policy rate by 25 basis points in the third quarter policy review as global conditions were favourable and marginal decline in WPI inflation provided room for some monetary easing.

On January 29 India's central bank lowered its key policy repo rate by 25 basis points (bps) to 7.75 percent to help support an economy set to post its slowest annual growth rate in a decade..

It also unexpectedly reduced the cash reserve ration (CRR) , the share of deposits banks must keep with the central bank, by 25 bps to 4.00 percent, to infuse an additional 180 billion rupees into the banking system.

The committee consists of seven external members, apart from the governor and the deputy governors. The panel's role is purely advisory, with the governor having the final say in deciding rates.

Two of the members felt that a 25 basis points reduction in the repo rate alone might not induce banks to reduce their lending rates and advised a cut in the banks' cash reserve ratio (CRR) of 25 basis points to nudge the lending rates down was in order. This would also enable loan rates to reduce more than deposit rates.

One of the other two members felt that the Reserve Bank should make use of open market operations (OMOs) to manage liquidity and keep the CRR unchanged. These two members recommended a sharper reduction in the repo rate by 50 basis points and use of OMOs to manage liquidity.

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