Governor D Subbarao went ahead to reverse the Reserve Bank of India’s (RBI) policy stance in the April review, despite a majority of the external members on its monetary policy committee suggesting only a pause.
After raising policy rates 13 times between March 2010 and October 2012, the central bank maintained status quo in the next three policy meetings. Then, in April, it had reduced the key repo rate (at which it lends money to banks) for the first time in these three years, by 50 basis points (bps) to eight per cent, to boost sluggish growth.
RBI has released the minutes of the April 11 meeting of its Technical Advisory Committee on monetary policy. The meeting, chaired by Subbarao, was attended by the four deputy governors. The six external members (five attended) are—Shankar Acharya, Rakesh Mohan, Indira Rajaraman, Sudipto Mundle, Errol D'Souza and Ashima Goyal.
| RBI ACTIONS VS PANEL SUGGESTIONS | ||
| Month | TAC recommendations | RBI actions |
| Apr ’12 | Repo rate 4 members suggested pause | Rate cut by 50 bps |
| Cash reserve ratio Most member suggested no CRR cut | CRR unchanged | |
| Jan ’12 | Repo rate 3 members suggested rate cut by 25 bps 3 members suggested no change | Rate unchanged |
| Cash reserve ratio 2 members suggested cut by 25 bps 1 member suggested cut by 50 bps 2 members suggested no change 2 members suggested change only if necessary | Cut by 50 bps | |
| Oct ’11 | Repo rate 1 member suggested raise by 25 bps 5 members suggested no change | 25 bps hike |
| Statutory liquidity ratio 1 member suggested raise by 25 bps | No change | |
| Jul ’11 | Repo rate 1 member suggested raise by 25 bps 2 members suggested avoid rate increase 4 members suggested no change | 50 bps increase |
| Cash reserve ratio 1 member suggested raise by 25 bps | No change | |
| Apr ’11 | Repo & reverese repo rates 4 members suggested 25 bps increase in each rate 2 members suggested 50 bps increase in each rate | Each raised by 50 bps |
| Statutory liquidity ratio 1 member suggested 100 bps increase | No change | |
| Jan ’11 | Repo & reverse repo rates Most members suggested 25 bps increase in each rate 1 member suggested 50 bps increase in repo rate | Each raised by 25 bps |
| Cash reserve ratio 1 member suggested increase | No change | |
| Statutory liquidity ratio 1 member suggested increase | No change | |
| (TAC stands for Technical Advisory Committee on Monetary Policy) Source: Reserve Bank of India | ||
RBI said four of the six external members suggested the Reserve Bank should continue to just pause, not raise or lower the rate. These members felt unless supply-side constraints were addressed and relevant measures taken to revive investment, a reduction in the policy rate would not have any impact.
Of the four members who wanted only a pause, one suggested banks' cash reserve ratio (CRR) floor be reduced by 50 bps. RBI had reduced CRR by 75 bps to 4.75 per cent since January, to ease liquidity pressure. Another felt CRR was already at a low level and varying it should be used sparingly. The other two did not suggest any change in CRR. The other two of the six external members suggested the policy rate be reduced by 25 bps. One of them also suggested a reduction in CRR by 50 bps.
Regarding the external situation, most members felt there was a need for heightened vigilance and the rupee should be allowed to depreciate. "The high twin deficits (current account and fiscal), combined with persistently high inflation for about two years, have made the economy more vulnerable to external shocks. It was underscored that the Reserve Bank should assign more weight to preserving external stability," the minutes said.
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Some members felt reliance on short-term and debt-creating flows be avoided to finance the current account deficit (CAD). Instead, the focus should be on bringing down CAD to a sustainable level, the members said.
"These members were of the view that in the presence of significant inflation differential between India and the rest of the world, and subdued capital inflows, the exchange rate should be allowed to depreciate," it said. The Indian currency has lost nine per cent since March, despite intervention by RBI in terms of dollar sales and regulatory measures. Last week, RBI asked exporters to liquidate half their dollar holdings within a fortnight, fixed intra-day trading limits at five times the limits on net overnight open positions of banks and increased the ceiling on interest rates offered on currency non-resident deposits.