RBI Guv Went by Expert Advice in Jan Policy

New Delhi: For the first time in eight quarters , Reserve Bank governor D Subbarao chose to go with his external advisors in taking monetary policy measures in the quarterly policy review announced in January . This was in sharp departure from the previous quarters , when he ignored the majority view of the technical advisory committee on monetary policy .

On January 29, the central bank lowered its key policy repo rate by 25 basis points to 7.75% to help revive growth in the economy . It also reduced the cash reserve ratio , or CRR by 25 bps to 4% to infuse an additional . 18,000crore into the system .

“All external members were unanimous in recommending a reduction in the policy repo rate ,” according to the minutes of the January 23 , 2013 , meeting of the committee released by the RBI. “Four of the six members suggested that the Reserve Bank should reduce the policy rate by 25 basis points . They felt that favourable global conditions as well as marginal decline in WPI inflation provide room for some monetary easing . This would also support the reform initiatives implemented by the Government ,”the RBI release said .

Two external members felt that a 25 bps reduction in the repo rate alone may not induce banks to reduce their lending rates . They recommended a 25 bps cut in CRR to nudge the lending rates down . This would also enable loan rates to reduce more than deposit rates , they reasoned . One of the members felt the central bank should conduct open market operations , or OMOs, to manage liquidity and keep the CRR unchanged . Two members recommended a sharper reduction in the repo rate by 50 basis points and use of OMOs to manage liquidity .