Minutes of the September 24, 2014 Meeting of the Technical Advisory Committee on Monetary Policy by RBI

 The thir­ty-sev­enth meet­ing of the Tech­ni­cal Advi­so­ry Com­mit­tee (TAC) on mon­e­tary pol­i­cy was held on Sep­tem­ber 24, 2014 in the run up to the Fourth Bi-month­ly Mon­e­tary Pol­i­cy Review of 2014–15 on Sep­tem­ber 30, 2014.The main points of dis­cus­sion in the meet­ing are set out below.

  1. Some Mem­bers viewed the glob­al recov­ery as less dynam­ic than six months ago, with signs of recov­ery in the US, but weak­er growth in Japan, the Euro area and Chi­na. Accord­ing­ly, over­all glob­al growth will remain below poten­tial. To that extent, the demand for Indi­an exports would be mod­er­at­ed. Oth­er Mem­bers felt that con­straints from glob­al devel­op­ments have eased some­what. They under­scored the need to mon­i­tor the diver­gence in cross-coun­try busi­ness and mon­e­tary pol­i­cy cycles, giv­en that the US is about to exhib­it a stronger recov­ery in growth, while Japan, Chi­na and Euro area may sus­tain or even expand quan­ti­ta­tive eas­ing. Giv­en that the Indi­an growth cycle may be more syn­chro­nised with the US cycle, these Mem­bers were of the opin­ion that India could actu­al­ly ben­e­fit from a stronger revival in US growth, because the ben­e­fi­cial effects through high­er trade and invest­ment will pos­si­bly, at least par­tial­ly, off­set the adverse impact of expect­ed cap­i­tal out­flows in response to even­tu­al tight­en­ing of mon­e­tary pol­i­cy by the US Fed­er­al Reserve (Fed), par­tic­u­lar­ly in view of the fact that mar­kets may have already fac­tored in some part of the Fed’s expect­ed actions.
  2. On the domes­tic front, Mem­bers not­ed that while mar­ket sen­ti­ment has improved, eco­nom­ic activ­i­ty con­tin­ues to be weak and there is dis­con­nect between cor­po­rate sec­tor activ­i­ty and buoy­an­cy in the cap­i­tal mar­ket. The pick-up in real GDP growth in Q1 of 2014–15 was pri­mar­i­ly due to a favourable base effect. In Q2, the base effect will turn unfavourable and growth could reg­is­ter a fall and may remain below poten­tial for some time to come. There is uncer­tain­ty on growth in agri­cul­ture due to the uneven tem­po­ral and spa­tial dis­tri­b­u­tion of rain­fall. Indus­tri­al activ­i­ty has slumped after some ini­tial gain, stalled projects are yet to be brought back on-stream, and there is no pick-up in invest­ment as com­pa­nies are risk averse and ser­vices sec­tor growth out­look is unclear with mixed signals.
  3. Some Mem­bers derived com­fort from the recent decline in inflation.Food infla­tion, after remain­ing sticky in dou­ble dig­its, has come down due to sup­ply man­age­ment by the Gov­ern­ment, low­er increas­es in the min­i­mum sup­port prices, and mod­er­a­tion in real wage growth. CPI infla­tion exclud­ing food and fuel has also fall­en, indi­cat­ing that there is no per­sis­tent excess demand in the econ­o­my. They expect­ed infla­tion­ary expec­ta­tions of house­holds would see a sharp drop, if food prices cor­rect. Oth­er Mem­bers stressed that dis­in­fla­tion – from the stand point of mon­e­tary pol­i­cy – should be seen as a clear change in the trend rate of infla­tion. Endur­ing dis­in­fla­tion is wel­fare enhanc­ing in the long run, notwith­stand­ing the tran­si­tion­al costs dur­ing the peri­od of sus­tained dis­in­fla­tion. They cau­tioned that a back­ward look­ing infla­tion expec­ta­tions for­ma­tion process can endan­ger the infla­tion sit­u­a­tion by mak­ing it iner­tial. There­fore, if the Reserve Bank’s infla­tion­tar­gets are not firm­ly believed by the pub­lic, anchor­ing infla­tion expec­ta­tions will be dif­fi­cult. In view of the adap­tive nature of infla­tion expec­ta­tions, there is an even stronger case for for­ward look­ing mon­e­tary pol­i­cy state­ments. One Mem­ber not­ed the sharp decline in whole­sale price infla­tion. While the gap between whole­sale and retail price infla­tion con­tin­ued to remain wide with an increase in the retail mar­gin, going for­ward, the mar­gin will reduce and the gap would close.
  4. On exter­nal sec­tor risks, Mem­bers were of the view that the cur­rent account deficit has widened some­what, though it remained low­er than its lev­el last year. Favourable exter­nal fac­tors are: (a) more sta­ble nature of cap­i­tal flows; (b) soft­er com­mod­i­ty prices; and © signs of revival in the US econ­o­my. The key down­side risks, how­ev­er, are even­tu­al tight­en­ing by the Fed and geo-polit­i­cal devel­op­ments. If, because of a sud­den change in risk appetite after the Fed tight­en­ing, the exchange rate becomes volatile again, then this will require care­ful man­age­ment. If the inter­est rate dif­fer­en­tial turns adverse for India, some more depre­ci­a­tion of the rupee may be accept­ed. They advised the Reserve Bank to be alert on the exchange rate front, with watch­ful­ness on the move­ments in the nom­i­nal and real effec­tive exchange rates.
  5. On pol­i­cy action, three of the sev­en exter­nal Mem­bers rec­om­mend­ed no change in the pol­i­cy repo rate. With a weak domes­tic and world econ­o­my, mod­er­at­ing infla­tion, oil prices trend­ing down­wards, com­mod­i­ty prices past their super cycle, there was a case for eas­ing the pol­i­cy rates and help­ing growth. Yet, they vot­ed against a cut in there­po rate in this pol­i­cy announce­ment. They were of the view that if the pace of dis­in­fla­tion is faster than what is antic­i­pat­ed now, then there may be a case for a rate cut, par­tic­u­lar­ly if infla­tion expec­ta­tions also soft­en. One of these three Mem­bers rec­om­mend­ed that the statu­to­ry liq­uid­i­ty ratio (SLR) may be cut by 100 basis points so as to raise the cred­it-deposit ratio while being con­sis­tent with the fis­cal con­sol­i­da­tion path. Four Mem­bers rec­om­mend­ed that the pol­i­cy repo rate be reduced. Three of the four Mem­bers sug­gest­ed a reduc­tion by 25 basis points. Accord­ing to these Mem­bers, since indus­tri­al demand is stag­nat­ing, some focus on the more press­ing need of weak demand and high lev­els of unem­ploy­ment would be con­sis­tent with fight­ing infla­tion. With the decline in head­line CPI infla­tion, the real pol­i­cy rate has become pos­i­tive. Pos­i­tive real rates were required by the Reserve Bank to meet its 6.0 per cent tar­get by Jan­u­ary 2016. If infla­tion reduces fur­ther, the real pol­i­cy rate will keep on increas­ing. There­fore, they were of the view that at this junc­ture, the Reserve Bank can afford a reduc­tion in the repo rate by 25 basis points. One Mem­ber rec­om­mend­ed a sharp­er reduc­tion of 50 basis points in the pol­i­cy repo rate with an emphat­ic for­ward guid­ance that there will be no fur­ther fol­low up of the rate cut. The decrease in pol­i­cy rate, accord­ing to this Mem­ber, would not dam­age the infla­tion path since CPI infla­tion exclud­ing food and fuel had come down and the Reserve Bank had already achieved what it want­ed to do in the near-term.
  6. The meet­ing was chaired by Dr. Raghu­ram G. Rajan, Gov­er­nor. Inter­nal mem­bers: Dr. Urjit R. Patel (Vice-Chair­man), Shri Harun R. Khan, Shri R. Gand­hi, and Shri S.S. Mundra, Deputy Gov­er­nors; and exter­nal Mem­bers: Shri Y.H. Malegam, Dr. Shankar Acharya, Dr. Arvind Vir­mani, Prof. Indi­ra Rajara­man, Prof. Errol D’Souza, Prof. Ashima Goy­al, and Prof. Chetan Ghate were present in the meet­ing. Offi­cials of the Reserve Bank Shri Deep­ak Mohan­ty, Dr. Michael D. Patra, Shri B.M. Mis­ra, Dr. B.K. Bhoi and Dr. G. Chat­ter­jee were in attendance.

 

Since Feb­ru­ary 2011, the Reserve Bank has been plac­ing the main points of dis­cus­sions of the meet­ings of TAC on Mon­e­tary Pol­i­cy in the pub­lic domain with a lag of rough­ly four weeks after the meeting.

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