Governor went with advisors' suggestions on policy rate move

RBI Governor Raghuram Rajan went by the recommendations of the majority of his advisors on interest rate decision as the interpolicy reduction two weeks before the scheduled monetary policy review had done much of the job. But they warned about the impending ill effects of a strong rupee.

Four out of seven members had recommended no change in policy rates, said a release from RBI on the minutes of the Technical Advisory Committee (TAC) meetings during last week of January. Three believed interest rate should be cut as inflation and expectations of price pressures are lower than the glide path recommended by the Urjit Patel Committee.

"The members opined that there was no noticeable change in the environment since the policy rate action of mid-January 2015," said the RBI release. "Further action should be only after the Union Budget was presented so that there was clarity on measures proposed to increase potential output and on fiscal consolidation, which would anchor inflation expectations."

RBI in its bi-monthly review of the monetary policy on February 3 kept policy rate unchanged at 7.75%. Rajan lowered the amount of deposits that banks have to hold in government bonds, known as the Statutory Liquidity Ratio, by 50 basis points to 21.5%.

One member recommended a 75 bps reduction in the policy rate as the economy is stagnating and is in urgent need of a monetary policy push.On the external sector, members were concerned about continued overvaluation of the rupee, which hurts the financial health of the external sector, besides eroding the country's trade competitiveness in the international markets. The Indian rupee is among the best performing emerging market currencies in the world.

Already fall in export growth is a worry. A member said the longer this overvaluation persists, the greater are the dangers of protectionist actions through tradeindustrial policies.

Priority Tag for Jan Dhan Overdraft

The Reserve Bank of India (RBI) has allowed banks to treat any overdraft facility up to Rs 5,000 extended under the Pradhan Mantri Jan Dhan Yojana as priority sector or weaker section loans. But such loans will qualify as priority sector only when borrowers' household annual income does not exceed Rs 60,000 for rural areas and Rs 1,20,000 for non-rural areas.