January rate hike overruled external committee members

MUMBAI (Reuters) - Reserve Bank of India (RBI) Governor Raghuram Rajan's surprise decision to raise interest rates last month was opposed by most external members of an advisory committee, minutes released on Monday showed.

The RBI hiked its key interest rate by 25 basis points to 8 percent on January 28, saying it would dampen inflation and leave it better prepared to deal with the risk of major capital outflows as the U.S. Federal Reserve withdraws stimulus.

Minutes released by the central bank showed a majority of the seven external members of a panel that advises on monetary policy suggested that rates should be held steady. The panel also comprises the RBI's four deputy governors and the governor, who has the final say.

Four of the six external members of the RBI's technical advisory committee (TAC) who attended the meeting on January 20 suggested no change in the repo rate, while two recommended a rate hike by 25 basis points.

Committee members advocating a hike believed that "since CPI (consumer price) inflation excluding food and fuel is flat, and WPI (wholesale price) inflation excluding food and fuel has gone up, the Reserve Bank should raise the repo rate to be consistent with its guidance," the minutes said.

The members were of the view that the Fed's tapering of its huge monetary stimulus programme was a major source of risk, despite diminished uncertainties, and that any further deceleration in growth could trigger more capital outflows.

"RBI should closely monitor the real effective exchange rate and build up reserves further for crisis-proofing," the minutes said. Most members expressed concern about elevated inflation expectations, however, adding they expected headline inflation would come down further if food prices continued to decline.

Political uncertainty in the near-term was seen as the dominant factor constraining monetary policy. India is due to hold national elections by May.

The 12-member panel, which meets before every quarterly monetary policy review, is advisory in nature and has no voting powers. The central bank started releasing minutes of its meetings from February 2011.

(Reporting by Archana Narayanan; Editing by Catherine Evans)