Reserve Bank of India Governor Raghuram Rajan went along with the recommendations made by the majority of external members — four out of five — of the central bank’s Technical Advisory Committee on Monetary Policy in maintaining status quo in the sixth bi-monthly monetary policy.
The RBI kept the policy repo rate (the interest rate at which it provides short-term liquidity to banks to help overcome temporary mismatches) unchanged at 6.75 per cent on February 2.
Among others, the reasons cited by the members for status quo in rates were: all measures of inflation have increased; the impact of implementing the Seventh Pay Commission recommendations on the evolution of headline and core inflation in the medium term needs to be watched; the fall in commodity prices convey a weak global economy, high services inflation remains a concern; and inflationary expectations continue to show inertia and are elevated.
Further, the members felt that industry continues to underperform, which, along with the fall in external demand, justifies taking some measures to stimulate domestic demand. Also, the members felt that it may be worthwhile to assess supply-side measures and fiscal consolidation efforts outlined in the Budget before making a move to cut policy rates.
One of the members held the view that given the continuing weakness in the domestic economic recovery and the growing signs of further weakness in the international economy, consideration may be given to an out-of-cycle policy rate reduction, synchronised with the Union Budget.
Such synchronisation could have salutary “confidence effects” on the flagging domestic private investment. The fifth member recommended a policy repo rate reduction by 50 basis points.
Members observed that faltering growth from China and other emerging market economies (EMEs) will continue to lead to outflow of capital from EMEs, including India, leading to possible downward pressure on the rupee. A strengthening US dollar will make the cost of servicing debt denominated in dollars harder to bear for emerging markets.
The external members of TAC are: Shankar Acharya, Arvind Virmani, Errol D’Souza, Prof Ashima Goyal, and Chetan Ghate