Reserve Bank Governor Raghuram Rajan went by the majority opinion of panel members and increased a key interest rate by 0.25 percent in the second-quarter monetary policy review last month in view of high inflation.
“Expressing concerns on inflation, as also on the external front, four members supported raising the repo rate by 25 basis points (0.25 percent) while bringing down the marginal standing facility (MSF) rate by the same amount,” the RBI said in a release Thursday.
The members unanimously wanted to restore symmetry in the policy corridor with the MSF rate 1 percent higher than the repo rate, the central bank said.
However, one member also recommended an increase in access to the liquidity adjustment facility (LAF) window through overnight repos to 0.6-0.7 percent of banks’ net demand and time liabilities to reduce the overall cost of borrowing for banks, the RBI said.
Two members wanted no change in the repo rate.
“These members were of the view that since an increase in the repo rate would have a negative impact on growth, no effect on food or overall inflation and only a limited effect in terms of bringing down inflation expectations, it is better to keep the operating rate low to support growth,” it said.
One member, deriving comfort from low WPI inflation after excluding food and fuel, advised the RBI to address growth risks and to cut the repo rate by 0.25 percent.
The members of the Technical Advisory Committee on Monetary Policy were unanimous that growth impulses in the Indian economy are weakening, especially in the industrial and services sectors.
“In particular, the capital goods industry’s order book position has stalled with inventory levels having come down and along with production cuts, staff lay-offs have also started,” they suggested.
Members also believed that the overall momentum of growth could be slow in 2013-14, while some said the “risk of slippage on the fiscal deficit remains.”
However, some said “the government might contain the deficit to committed levels by cutting down expenditure, but this could have an adverse impact on growth.”
Some members said inflation was not the immediate concern and the vegetable price shock may be temporary and not a major source of second-round effects.
Inflation based on the wholesale price index soared to an eight-month high of 7 percent in October as onion and vegetable prices rose. Costlier vegetables and fruits drove retail inflation to 10.09 percent during the month.
The RBI said some members believed external risks were low because of postponement of tapering of quantitative easing by the US, though that could be short-lived.
Other members of the Technical Advisory Committee were of the view that risks to the current account deficit (CAD) remain elevated.
“Since GDP is expected to be low, the sheer size of CAD as a ratio to GDP might be higher. Members cautioned that tapering-induced shocks in the form of capital outflows would demand immediate action from the RBI,” it said.
The CAD for 2012-13 was USD 88 billion. However, Finance Minister P Chidambaram has committed to contain it at well below USD 60 billion this year.
The meeting that was held on October 23 was chaired by Governor Rajan. Deputy Governors Urjit Patel, KC Chakrabarty, Anand Sinha and Harun R Khan were among the internal members of the committee.
Y H Malegam, Indira Rajaraman, Shankar Acharya, Arvind Virmani, Ashima Goyal, Errol D’Souza and Chetan Ghate were among the external members.
PTI