Majority of external advisers on RBI panel wanted rates held

Mumbai: Reserve Bank of India (RBI) governor D. Subbarao went against the majority view of the external members on the central bank’s technical advisory committee (TAC) on monetary policy when he reversed the rate-tightening cycle in April and slashed the repo rate in a bid to shore up flagging growth.

Four out of six external members on RBI’s technical committee suggested that the central bank should keep interest rates on hold, according to the minutes of the committee released by the central bank on Monday. “They felt that unless supply-side constraints were addressed and relevant measures taken to revive investment activity, the reduction in the policy rate would not have any impact,” RBI said on its website.

The other two members wanted the policy rate to be reduced by 25 basis points (bps). In the event, RBI cut the repo rate, at which it lends overnight funds to banks, by 50 bps to 8% in its annual monetary policy review on 17 April. One basis point is one-hundredth of a percentage point.

This was the first cut in rates since April 2009, marking the reversal of the monetary policy stance that has focused on containing inflation in the past three years.

The seven external members of TAC are RBI board member Y.H. Malegam, former deputy governor Rakesh Mohan and economists Shankar Acharya, Sudipto Mundle, Errol D’Souza, Ashima Goyal and Indira Rajaraman.

Malegam did not attend the meeting, according to the minutes.

The committee is chaired by governor Subbarao and advises RBI on monetary policy.

Of the four who suggested a pause, one said the cash reserve ratio (CRR) should be reduced by 50 bps, while the other three didn’t suggest any changes. CRR is the amount of deposits banks set aside with RBI for no interest.

One of the members who suggested that the repo rate be reduced by 25 bps also wanted a reduction in CRR by 50 bps.

CRR, which was unchanged in the April policy, had been reduced by a cumulative 125 bps in two steps since January, to increase the supply of cash in the system.

RBI said in April that the chances of any further reduction in the policy rate were low because rising inflation may limit its ability to do so.

The figures released on Monday showed India’s inflation unexpectedly accelerated in April, lowering the chances of any further rate cuts by RBI. The benchmark Wholesale Price Index rose 7.23% from a year earlier, after climbing 6.89% in March. A median of 32 estimates in a Bloomberg survey was for a 6.67% gain.

In the meeting that took place 11 April, the committee members noted the significant moderation in both headline and non-food inflation.

“However, they were concerned with several upside risks to inflation from global commodity prices, high fiscal deficit, suppressed inflation and a sharp increase in real rural wages,” RBI said.

Committee members wanted RBI to assign more weight to preserving external stability, with some even suggesting that the rupee be allowed to depreciate.

“Our policy should be more proactive in managing current account deficit (CAD) risks... The focus should be on bringing down CAD to a sustainable level. (In) the presence of significant inflation differential between India and the rest of world and subdued capital inflows, the exchange rate should be allowed to depreciate,” the minutes said.

On Monday, the rupee fell to a record close of 53.97 to the dollar, even as traders said the Indian currency was set to slump further and the central bank will be unable to stem the slide as the rupee is following global cues, not domestic ones. The Monday close was near the lowest intra-day level of 54.30 the rupee reached on 15 December.

RBI has been posting minutes of the TAC meetings on its website since February 2011, with a lag of roughly four weeks after the meetings.

joel.r@livemint.com