Rajan backs views of most TAC members

Panel on monetary policy wanted a rise of 25 basis points in repo rate and a cut in MSF rate by the same amount

Last month, Reserve Bank of India (RBI) Governor Raghuram Rajan went with the views of most members of the technical advisory committee (TAC) on monetary policy—raising the repo rate and reducing the marginal standing facility (MSF) rate, according to the minutes of the meeting released on Thursday.

At the meeting, four members of the committee had expressed concern on inflation and on the external front and had favoured raising the repo rate by 25 basis points, while cutting the MSF rate by the same amount.

All members of the TAC on monetary policy wanted RBI to restore the 100-basis point corridor between the repo rate and the MSF rate in the second quarter monetary policy review on October 29.

Seven external members were present at the meeting.

One of the members recommended an increase in access to the liquidity adjustment facility (LAF) window, through overnight repos, to 0.6-0.7 per cent of banks’ net demand and time liabilities. This was sought to reduce the overall cost of borrowing for banks. Two members favoured the repo rate be kept unchanged. “These members were of the view that since an increase in the repo rate would have a negative impact on growth, no effect on food or overall inflation and only a limited effect in terms of bringing down inflation expectations, it was better to keep the operating rate low to support growth,” the minutes said. To make the corridor symmetric, this implied a 50-basis point reduction in the MSF rate.

One member, pointing to the low Wholesale Price Index-based inflation, excluding food and fuel, advised RBI to address growth risks and cut the repo rate by 25 basis points, along with normalising the corridor width to 100 basis points. The member also emphasised the need to ease access to working capital loans for small and medium enterprises to support growth in general, and exports in particular.

Some members felt inflation wasn’t the immediate concern. Their outlook on inflation was optimistic due to various factors---arresting of the rupee’s depreciation, softening of global commodity prices and a good monsoon, which augured well for agriculture. Other members believed inflation risks were high, as Consumer Price Index-based inflation (both headline and excluding food and fuel) were high.

External sector risks, some members said, were few because of the postponement of tapering of the bond-buying programme in the US, though the pause could be short-lived. Other members felt risks to the government’s current account deficit (CAD) were high. As growth in gross domestic product was expected to be low, the sheer size of CAD as a ratio to GDP might be high, some felt.