All members of the Reserve Bank of India's Technical Advisory Committee (TAC) unanimously suggested that the central bank should continue with the anti-inflationary stance of monetary policy.
According to the Committee, inflation would continue to be at an elevated level in the first half of 2011-12, before moderating.
“Going forward, inflation was a major risk to growth. It was, therefore, necessary to contain inflation and anchor inflation expectations so that long-term growth prospects of the economy were not harmed,” according to the minutes of the 24th meeting of the TAC released by the RBI on Monday.
The committee felt that there were some signs of investment demand slowing down and that the growth in 2011-12 could be lower than that estimated for 2010-11. The committee's meeting was held on April 27, 2011.
Inflation, according to the committee, continued to be a major challenge for the Reserve Bank. A sharp rise in inflation, especially non-food manufacturing, in March 2011 was a cause of serious concern.
Inflationary expectations were at an elevated level and it needed to be ensured that they did not get entrenched, the committee observed.
While four members of the Committee were of the view that the repo and reverse repo rates be raised by 25 basis points each, two members suggested 50 basis points increase each in the repo rate and the reverse repo rate.
Eventually, to tackle the rising inflationary pressures, the RBI abandoned its ‘calibrated, baby-step approach' to monetary tightening and increased the repo and the reverse repo rates by 50 basis points to 7.25 per cent and 6.25 per cent in its annual policy announcement on May 3, 2011.
A committee member was of the view that the statutory liquidity ratio (SLR) could be increased by 100 basis points and the repo facility of the Reserve Bank be limited up to 2 per cent of excess SLR securities held by banks.
A member also felt that the Reserve Bank could consider certain controls, if capital inflows became excessive.
Deficit worries
Some members felt that the fiscal deficit (of 4.6 per cent) budgeted in the Union Budget 2011-12 was likely to exceed and that demand management efforts of the Reserve Bank would need to be supplemented by the Government.