On policy actions, RBI guv goes with the minority

It seems Reserve Bank of India’s (RBI) governor D Subbarao favours the minority when it comes to monetary policy actions. Last month, Subbarao heeded the lone voice in the technical advisory committee (TAC) on monetary policy, that sought a cut of 50 basis points in the cash reserve ratio. Other members of the panel had recommended that the rates be kept unchanged, while some sought a cut of 25 basis points.

By keeping the repo rate unchanged, the governor also ignored the suggestions of at least four members of the panel.

This is not the first time the RBI governor has preferred the minority’s recommendation. In October, Subbarao had announced a 25-basis point rise in the repo rate, though five members of the TAC had suggested the rate be kept unchanged. However, the statutory liquidity ratio was not revised, despite a member suggesting a 25-basis point rise.(Click here for table)

The central bank had increased the repo rate by 50 basis points in the previous quarter, when four members favoured no action on the rate front, while two suggested a rise be avoided if possible. One member had sought a 25-basis point rise. While one member said the cash reserve ratio should be raised by 25 basis points, the banking regulator kept it unchanged.

Similarly, in April, the RBI governor chose to listen to two TAC members who favoured 50-basis point increases each in the repo and reverse repo rates, while four had recommended a 25-basis point increases in the rates. Since February 2011, RBI has been placing the main points of discussions in TAC meetings in the public domain with a lag of roughly four weeks.

On Friday, the central bank released the minutes of the TAC meeting held on January 18. “Three external members suggested the policy repo rate should be reduced by 25 basis points, while one member suggested it be reduced by 50 basis points. Of these, one member also suggested a reduction of 50 basis points in the cash reserve ratio and another sought a 25-basis point cut,” RBI said. Some members had also suggested any cut in the cash reserve ratio should be outside regular policy announcements.

The minutes showed some TAC members were ready to settle for low growth, anticipating the runaway rise in prices would continue. With inflation still above the central bank’s comfort level of 4.5-5 per cent, they deemed it necessary to maintain policy rates at current levels.

Concern was raised at the fact that the fiscal deficit target was likely to slip significantly in the current financial year. “Some members felt fiscal pressure would continue beyond 2011-12, as the monetary impact of entitlements such as the Mahatma Gandhi National Rural Employment Guarantee Act and oil, fertiliser and food subsidies would be significant,” the minutes said. Some had suggested RBI should hold back a rate reversal until clear signals of “credible” fiscal consolidation emerged.

All the members in the committee, however, expressed concern on the slowdown in investment and suggested the policy focus be changed from managing inflation to managing the slowdown in investment.