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The TAC meets once every quarter; it doesn’t meet before the central bank’s mid-quarter reviews. In its monetary policy review in April, RBI had cut the repo rate 50 bps, though most TAC members wanted status quo or a cut of 25 bps. In the July quarter review, RBI adhered to the TAC’s suggestion of status quo. In the October quarter, however, RBI went against the TAC’s suggestion of a cut in the rate, opting for status quo.
“Four of the six members suggested RBI reduce the policy rate by 25 basis points. They felt favourable global conditions, as well as a marginal decline in wholesale price index (WPI)-based inflation provided room for some monetary easing. This would also support the reform initiatives implemented by the government,” said a press release issued by RBI on the minutes of TAC’s last meeting. (THE WAR WITHIN)
Two of these members felt a 25-bps cut in the repo rate might not be enough to induce banks to reduce lending rates. They also recommended a 25-bps cut in the cash reserve ratio (CRR). At the policy meet, RBI had cut CRR by 25 basis points to four per cent of banks’ net demand and time liabilities, effective February 9.
One of the other two members felt RBI should keep CRR unchanged and instead, use open market operations (OMOs) to manage liquidity. Two members recommended a 50-bps cut in the repo rate, as well as OMOs.
TAC members felt WPI-based inflation, despite some deceleration in it, continued to be high and double-digit consumer price index (CPI)-based inflation was a concern. “The economy should benefit from the likely softening of global commodity prices, which will bring down headline inflation,” said the minutes of the TAC meeting.
Members of the committee also felt inflation was likely to rise, as the government moved to correct prices of petroleum products. “The CPI is already carrying some cost of fiscal correction, since the base of the service tax has been substantially increased. According to some members’ assessments, inflation in FY14 could be only marginally lower than in FY13,” the minutes said.
The ratio of the current account deficit (CAD) to gross domestic product had reached a historic high in the second quarter of FY13. TAC members said this was the most important macroeconomic concern. “Financing such high levels of CAD is worrisome, as it is accentuating external sector vulnerability. While the likely softening of global commodity prices may bring down CAD, the elevated levels of oil and gold imports are a major concern,” said the minutes.
In November-December, the demand for gold had risen. TAC members felt this was due to its value as an asset class. They said once inflation subsided and growth improved, there wouldn’t be too many incentives for a flight to safe-haven assets.
