Mumbai: Barring one, none of the members of the technical advisory committee that advises the Reserve Bank of India (RBI) on monetary policy wanted to increase interest rates in the first quarter review in July, edited minutes of the meeting show.
A majority of the members of the panel, chaired by the RBI governor, wanted the central bank to wait and watch for the transmission of past monetary actions and give equal weight to the objectives of “fostering growth and controlling inflation while formulating monetary policy,” according to the edited excerpts, posted on the central bank’s website. The views of the members, which include 10 outside members and several senior central bankers, are not binding on governor D. Subbarao.
Only one member of the panel favoured a 25 basis points hike in the policy rate. Two members felt that the increase in the policy rate should be avoided, if possible. But, “if the Reserve Bank needed to give a signal to the market about its continuing anti-inflationary stance, it could raise the repo rate by 25 basis points.”
RBI on 27 July shocked the markets by raising the policy rate by 0.5 percentage point to 8% to tame inflation that is running close to double digits. Inflation has cooled off marginally since then. It was at 9.44% in June, the latest figure available when the July meeting took place. Inflation has since slowed marginally to 9.22% in July.
One member also suggested an increase in banks’ cash reserve ratio, or the amount of money banks keep with the central bank free of cost, by 25 basis points, “segmented in such a way that the long-term investment was encouraged”. Another member urged RBI to give clear signals of more stringent capital requirements in future for systemically important financial institutions.
The committee members were worried about the then ongoing deliberations of US debt ceilings and the implications of European sovereign debt crisis. If the weakness of some of the euro zone countries in honouring their debt spilled over to Spain and Italy, “the consequences could be serious”, they said.
“If the US debt crisis was not resolved satisfactorily, it would have serious ramifications for the global economy,” the committee members said.
While the investment activities continue to slow, the committee was unanimous in their view that “inflation continued to be a major concern”, and that it continued to be “stubbornly high”.
However, some members were of the view that inflation cannot be controlled by monetary policy action, since they are cost-pushed. Most members felt the central government may fail to meet its fiscal deficit target for the year to 31 March.
The members were concerned that the fiscal situation had placed the entire burden of inflation management on the central bank. The committee said that the “uncertainty about the fiscal situation would continue to pose a serious challenge for monetary policy.”
Subsequently, RBI in the first quarter review acknowledged the view that there was little support from the government’s fiscal policies to control prices and, hence, it has to continue with a hawkish monetary stance. Industry bodies had demanded that the central bank cut interest rates.
RBI on 4 August reconstituted the members to include, among others, Rakesh Mohan, the former RBI deputy governor.