Rajan went with panel view on status quo

RBI has been placing the main points of discussions of the meetings of TAC on monetary policy in the public domain with a lag of roughly four weeks after the meeting

For the Reserve Bank of India (RBI)’s first bi-weekly monetary policy held on April 1, governor Raghuram Rajan decided to go with the recommendations of all the members of the technical advisory committee (TAC) and maintain status quo on policy rates.

The TAC meeting was held on March 26. RBI has been placing the main points of discussions of TAC meetings on monetary policy in the public domain with a lag of about four weeks.

These meetings are chaired by the RBI governor and attendees include senior RBI officials and external members, with expertise in various fields.

To manage the risks from capital outflows, most members recommended RBI focus on building foreign exchange reserves.

One member suggested to improve transmission of monetary policy signals, the statutory liquidity ratio be lowered to 22 per cent of net demand and time liabilities.

The TAC members emphasised the framing of the forward guidance (estimate) was important. “Forward guidance should aim at maintaining interest rate stability, while recognising the challenges of dealing with capital outflows and supply shocks in the process of negotiating the disinflation path set out for January 2016,” read the minutes.

At the March 26 meeting, one member felt while forward guidance was important for anchoring inflation expectations, it should indicate the policy would turn growth-supportive if inflation adjusted for base-effect declines. Another member recommended RBI give forward guidance of a decline in the repo rate.

Members expressed concern on inflation being persistently higher than in other countries. On the inflation outlook, most noted moderation in vegetable prices drove the recent dip in headline inflation, adding this was unlikely to be sustained.

The members felt growth in real gross domestic product would be muted. As exports and imports were declining, the manufacturing outlook was also weak, they said.

Some TAC members said risks on the current account deficit front couldn’t be ignored, considering the sluggish financial savings. In the near term, external sector risks might have eased because of a rise in forex reserves through the last six months. In the medium term, however, the risk of capital outflows remained and might be accentuated if the US Federal Reserve raised interest rates earlier than anticipated, they said. Other members expected a surge in foreign currency inflows, which would put upside pressure on the rupee.

The members cautioned against a policy of allowing the real exchange rate to appreciate. While exchange rate appreciation might help lower inflation, it wasn’t good for the economy, as some categories of exports were highly sensitive to real appreciation and due to the current account deficit, they said. One member felt an exchange rate below 60/dollar could hurt manufacturing growth due to severe import competition.

Some members were of the view that RBI must actively intervene in the foreign exchange market to prevent excessive exchange rate appreciation, while some questioned the need for intervention when capital inflows were high. They felt when inflows were high, companies should be allowed to adjust their balance sheets; RBI shouldn’t intervene in the market. Reserves should be used to manage volatility alone, not the exchange rate, they said.