Five of the six external members of the Reserve Bank of India’s Technical Advisory Committee on Monetary Policy (TAC) had suggested that the central bank reduce the policy rate prior to its half-yearly review of the monetary policy on October 30.
The RBI, however, kept the indicative policy rate unchanged while reducing the Cash Reserve Ratio (CRR) — the portion of deposits that banks keep with the central bank — by 25 basis points from 4.5 per cent to 4.25 per cent which was expected to pump in around Rs.17,500 crore liquidity into the banking system.
“They (five external members) felt that even though inflation is sticky, there are no demand pressures and there is a need to revive investments,” said the RBI. The TAC meeting was held on October 23.
The RBI has been placing the main points of discussions of the TAC on monetary policy meetings in the public domain with a lag of about four weeks after the meeting.
One member felt that higher growth would help in reducing the fiscal deficit. Of the five members, three recommended a reduction in repo rate by 25 basis points, while the other two suggested a sharper reduction of 50 basis points.
Among the members who recommended a repo rate cut by 25 basis points, one member also recommended a cut in CRR by 25 basis points to help banks bring down lending rates without reducing deposit rates.
One of the six members was of the view that the decline in the growth rate was largely due to fiscal factors; since inflation expectations were elevated, no change in the monetary policy stance was necessary.
Repo rate is the rate at which banks borrow funds from the central bank.
The meeting was chaired by RBI Governor D. Subbarao. Other internal members present were: Subir Gokarn, Vice-Chairman, Deputy Governors, K. C. Chakrabarty and Anand Sinha; and external members, Y. H. Malegam, Prof. Indira Rajaraman, Prof. Sudipto Mundle, Prof. Errol D’Souza and Prof. Ashima Goyal. Rakesh Mohan and Shankar Acharya could not attend the meeting. Dr. Mohan submitted his written views.
Some members were of the view that given the global conditions, commodity prices might not harden further and some softening of food inflation could also be expected because of late revival of the southwest monsoon. “These members felt that inflation might soften next year.”
On the other hand, some members felt that inflationary expectations were high. There are demand-side pressures since not only are wages increasing, but also the increase in managerial salaries and salaries of the organised sector is very sharp. They suspected that wage inflation might go up further and this was the last chance for the RBI to anchor inflation expectations.