RBI advisors wanted halt in rate rises but a still hawkish stance

RBI’s technical advisory committee (TAC) on monetary policy had advised the Reserve Bank of India (RBI) to take a pause in rate increases but had suggested maintaining a hawkish stance, in a meeting with RBI officials before the second quarter review of the policy.

The central bank, however, raised the policy rate by 25 basis points on October 25, the 13th time since March 2010, but signalled a pause on concerns of slowing economic growth. “On monetary measures, while one external member suggested an increase in the repo rate by 25 bps , the other five external members were of the view that the repo rate should not be changed,” RBI said in a press note on Thursday. The central bank releases the minutes of the TAC after the policy — a measure initiated recently in order to increase transparency.

“Some members, while suggesting a pause, felt the message of the Reserve Bank’s policy should be hawkish,” the release said.

Some members were also of the view that as inflation was driven by supply-side factors, monetary policy tightening was impacting investment and growth and not inflation. However, all the members observed that inflation was a major concern. “They also felt that inflation would not ease immediately,” RBI said.

However, some members were of the opinion that with the slowing global economy, it was expected that the global commodity prices may soften gradually, which should help moderate inflation, going forward. The meeting which was chaired by RBI governor D Subbarao, was attended by members of the TAC which included Shankar Acharya, Y H Malegam, Sudipto Mundle, Errol D’Souza and Ashima Goyal among others. Former RBI deputy governor Rakesh Mohan who was inducted as a committee member recently could not attend the meeting but had submitted his written view. All the central bank deputy governors and other senior officials also attended the meeting.

According to the minutes of the TAC meeting which was held on October 19, a member felt that a fall in food inflation from past high levels would help moderate inflation expectations. The members also reviewed the domestic macroeconomic situation and felt economic growth was moderating, with investment activity slowing down due to tight monetary policy and several other factors, including global uncertainty and delay in clearing the projects. Members also expressed concerns over moderation in growth in service and export sector, and projected a widening trade deficit.

Besides, they also sounded concerns over the high fiscal deficit and the risk of it slipping in the current financial year, combined with the increase in borrowings by the government.

Reflecting the global economic scenario particularly with regard to the Euro zone crisis, the members felt that the probability of an event shock was high and were not optimistic about any immediate solution to the debt problem. “The policy response by the authorities was too little and too late. The negative impact in the case of an event shock on emerging economies could be serious through the trade, financing and confidence channels. Members expressed concerns over the slow growth in the US. They also observed that the growth was slowing down in emerging market economies (EMEs),” the release said.