RBI Governor Raghuram Rajan seems to have ignored the majority view of the Technical Advisory Committee (TAC) on Monetary Policy while hiking rates, going by the minutes of the 35th meeting of the committee put out by the RBI yesterday. He had hiked the repo rate by 0.25 per cent to 8 per cent on January 28.
The recommendations of TAC are not binding. Besides, this is not the first time that the RBI Governor is going against the recommendations of TAC. Former Governor D Subbarao often chose to override the consensus view of TAC while hiking rates during the last two years.
The TAC committee meeting, held on January 20 in the run-up to the policy announcement on January 28, saw four members recommending a status quo and one member recommending a cut in rates.
Two members had recommended an increase. There are seven external members and four internal members ( the Governor and three Deputy Governors) on the 11-member committee. The main points of the meeting are usually put out in public domain about four weeks after the meeting.
Status quo in rates
The members, who recommended status quo in rates, felt that political uncertainty was a dominant factor constraining monetary policy.
They felt that given weak growth, a 25 bps increase in repo rate may not have much impact on inflation. Other factors that argued for status quo were the existence of excess capacity in the economy, decline in nominal rate of wage growth, softening of international commodity prices, and the stability in exchange rate.
One member had recommended a cut in the policy rate by 25 basis points to support interest-sensitive sectors, especially construction.
This member, while recognising that CPI inflation will remain elevated even in 2014-15, felt much of it was due to the aggressive push by the government for service tax collection.
Two members had recommended an increase in the policy repo rate by 25 basis points in order to be consistent with RBI’s guidance.
CPI core inflation
The minutes said that these members referred to the conundrum posed by high CPI core inflation coexisting with the negative output gap, and cautioned that when the economy recovers, there could be upward pressure on inflation. To address the elevated levels of inflation expectations, the Reserve Bank should not wait for stability in the political situation to emerge, they felt.