 "RBI Governor Raghuram Rajan at the fifth bimonthly monetary policy review in Mumbai on Tuesday, December 1, 2015 PTI")
Reserve Bank of India (RBI) Governor Raghuram Rajan heeded the consensus of the technical advisory committee on monetary policy to keep policy rates unchanged in the central bank’s fifth bi-monthly monetary policy on December 1, edited minutes of the consultation with external members, which happened through emails, showed.
Four of the five external members of the committee recommended status quo, citing sharp rise in Consumer Price Index-based inflation even as global commodity prices absorbed much of the price rise. Nevertheless, the members observed, there were some upside risks to inflation from negative monsoon shocks, supply side constraints, and recommendations of the Seventh Pay Commission.
The external members were surprised about the rise in inflation to five per cent in October, from 4.4 per cent in September.
“Firming up of inflation warrants monetary policy to be cautious as it keeps its immediate target of six per cent in its sight. Members felt that the rising inflation itself should warrant no change in financial accommodation,” the edited minutes said.
RBI kept its repo rate unchanged at 6.75 per cent even as it said some green shoots of recovery could be seen in certain pockets of the economy.
The members observed that the bar for further accommodations should increase as the central bank tried to contain inflation in the medium term. Currently, with inflation at five per cent, and the repo rate at 6.75 per cent, the real policy rate was at 1.75 per cent, in the middle of RBI’s preferred 1.5-2.0 per cent real neutral rate range, suggesting that the policy was rate neutral.
The prevailing slim negative output gap could be addressed through real sector policies, rather than monetary policy. Besides, the frontloaded monetary policy should be given time to work through the system, the members said. Since January, RBI reduced policy rates by 125 basis points, but banks only cut their lending rates by 50-60 basis points.
“Sharp variations in monetary policy stances of major central banks around the world in the coming month will lead to currency volatility,” the members observed. Considering all the factors, a pause was warranted, according to the panel.
However, one external member suggested a rate cut by 25 basis points as rretail inflation was low and within RBI’s target of the six per cent-mark by January 2016. The member assumed that the central government would meet its fiscal and revenue deficit targets in 2016-17.
The members said that demand and credit growth in banks continued to be weak with no significant change since the fourth bi-monthly monetary policy in September. While agricultural output remained stable or declined this year, a small improvement in the manufacturing and services sector indicated little uptick in economic activities, the members said. “Indicators of investment demand pick-up are scarce and the stress of bank balance sheets is still palpable,” the members said adding, the Index of the Industrial Production remained subdued, with only consumption of durables displaying robust growth.
However, there was some growth in the capital goods sector, reflecting the complementarity between public infrastructure capital and private investment. “Given the complementarity, it is unlikely that private investment will take-off unless there is a sustained increase in public investment in the economy,” the minutes said, adding the corporate sector, particularly in the infrastructure space, had poor balance sheets.
All five external members of the committee — Shankar Acharya, Arvind Virmani, Errol D’Souza, Ashima Goyal, and Chetan Ghate — sent their feedback through email.
