Technical panel told RBI to wait and watch on rate rise

The Reserve Bank of India (RBI) took a solitary step during the first quarter review of the monetary policy, as it resorted to a steep rate rise of 50 basis points (bps) though most members of its Technical Advisory Committee either suggested a pause or a 25 bps rise.

While a wait-and-watch policy was advised by most of the members, given the slowdown in domestic investment, the central bank chose to act immediately.

RBI, in its first quarter review of monetary policy review, raised the key policy rate by 50 bps to eight per cent, to send a strong anti-inflationary signal. Its action also surprised the market participants, as they were expecting a 25 bps hike.

The minutes of the committee's meeting, which took place a week before the July 26 policy decisions, was made public by the central bank on Thursday.

“While one member suggested an increase in the repo rate by 25 basis points, two members felt the increase in the policy rate be avoided, if possible. However, if the Reserve Bank needed to give a signal to the market about its continuing anti-inflationary stance, it could raise the repo rate by 25 basis points,” RBI said in a release on Thursday.

“The other four members were of the view that the past monetary policy actions had an impact and the transmission was still playing out. In view of this, as also the fact that the uncertainty in the global environment had increased and domestic investment was slowing, they suggested the Reserve Bank should follow a wait and watch policy,” it added.

However, according to the committee members, inflation continued to be a major concern but seen as largely driven by cost-push factors, not amenable to monetary policy action. In view of global uncertainty and deceleration of domestic economic activity, most members suggested equal weight be given to the objectives of fostering growth and controlling inflation while formulating monetary policy.

Regarding the government's fiscal position, most members felt there could be a slippage in the fiscal deficit budgeted in the Union Budget 2011-12.

“They were concerned that the fiscal situation had placed the entire burden of inflation management on monetary policy. Uncertainty about the fiscal situation would continue to pose a serious challenge for monetary policy. Some members also observed there had been no major economic reforms in the recent period,” the release said.