Subbarao went against his advisors, again

Reserve Bank of India (RBI) Governor D Subbarao seems to have a knack of doing the opposite of what members of the technical advisory committee (TAC) on monetary policy suggest.

In a meeting about a week before the central bank’s second-quarter review of monetary policy on October 30, an overwhelming majority in the committee had suggested a cut in the repo rate. While three of the six external members suggested a rate cut of 25 basis points, two favoured a 50-basis point cut. They said though inflation was sticky, there were no demand-side pressures, adding a rate cut was needed to revive investments.

In its monetary policy review on October 30, RBI had left the policy rate unchanged at eight per cent and cut the cash reserve ratio (CRR) by 25 basis points, on the grounds inflationary expectations were still high. (RBI ACTIONS vs TAC SUGGESTIONS)

RBI puts out the minutes of a TAC meeting in the public domain about four weeks after a particular meeting.

Of those who had recommended a 25-basis point cut in the repo rate, one had also favoured a 25-basis point cut in CRR to help banks reduce lending rates without reducing deposit rates.

Though most panel members said though there was some improvement in the government’s current account deficit (CAD), it was well above comfort levels and persistently high CAD was driven by specific relative prices, rather than aggregate demand. Some members also felt there was room for the real exchange rate to depreciate. They added every opportunity to raise foreign exchange reserves must be availed of. As on November 9, the country’s foreign exchange reserves stood at $293.5 billion.

The meeting was chaired by Subbarao. Internal members of the TAC include three RBI deputy governors — Subir Gokarn, K C Chakrabarty and Anand Sinha. Other members of the panel are Y H Malegam, Indira Rajaraman, Sudipto Mundle, Errol D’Souza and Ashima Goyal. Though former RBI deputy governor Rakesh Mohan, also a member of the TAC, couldn’t attend the meeting, his views were presented.

On the domestic front, the TAC members felt India was seeing challenging times. Aggregate demand was weakening and growth in credit and monetary supply were below RBI’s projections.

In the past, the central bank had acted against the recommendations of the committee on several occasions.

For instance, in January, though four of the seven committee members had recommended a rate cut in the third quarter review of monetary policy, RBI kept the rate unchanged.