The high fiscal deficit combined with the increase in government borrowings will pose a major challenge for liquidity and monetary management for the Reserve Bank of India. This was one of the observations of the Technical Advisory Committee on Monetary Policy in its meeting held on October 19.

Growth slowing down

All members of the TAC felt that the economic growth was moderating. In particular, investment activity was slowing due to tight monetary policy and other factors, including global uncertainty and delay in clearing projects.

A concern was also expressed about the service sector, which was showing signs of moderation. Some members felt that exports growth will also slow down, as a result of which trade deficit may widen.

Inflation a major concern

All members observed that inflation was a major concern. They also felt that inflation would not ease immediately.

The TAC observed that as inflation was driven by external/supply-side factors, the monetary policy tightening was impacting investment and growth and not inflation.

Monetary policy measures

Some members of the committee, while pitching for a pause, felt that the message of the Reserve Bank's policy should be hawkish.

On monetary measures, while one external member suggested an increase in the repo rate (the rate at which banks borrow from the RBI) by 25 basis points, the other five external members were of the view that the repo rate should not be changed.

One of the external members suggested an increase in the Statutory Liquidity Ratio (the percentage of deposits that banks have to invest in government securities) by 25 basis points, so that the borrowing by banks from the LAF (Liquidity Adjustment Facility) window of the RBI would be curtailed.

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