Mumbai: The Reserve Bank went along with the advice of majority of external members on a panel, which assists the apex bank on monetary policy, and kept its short-term lending rate unchanged at 8 percent in its July 31 policy review.
As per the minutes of the Technical Advisory Committee released, five of the seven external members recommended that the central bank should not change the policy rate.
"They felt that given the fiscal dominance, double-digit consumer price inflation and no realistic expectation of credible action from the government, the Reserve Bank needs to focus on tempering inflation expectations," it said.
The central bank said that the remaining two members suggested that there could be a symbolic reduction in the policy rate by 25 basis points to stimulate investment.
The TAC chaired by RBI Governor D Subbarao consists of all the four Deputy Governors and senior officials of RBI, in addition to external members.
On domestic macroeconomic front, the minutes said members felt the "current situation is by far the most difficult, in the last several years".
"All members felt that with the monsoon failure, food prices might go up significantly due to a substantial agricultural shortfall ... The economy is in a bind with slackening growth and elevated inflation, but the remedies, Members felt, lie with the Government," it said.
They observed that infrastructural bottlenecks in power, coal, and transport seem to have worsened, causing serious supply side pressures.
The manufacturing sector is at a standstill, with not only the capital goods industry in a bad shape, but also the short-cycle consumer products registering a contraction.
"In sum, members felt that there is growing evidence of slowdown of domestic growth," the minutes said.
Members also apprehended that on the fiscal front there could be a slippage in 2012-13, RBI said. "According to some Members, diesel price revision to contain subsidies looks very difficult due to the looming drought situation," it added.
The minutes further revealed that most Members observed that India's external sector concerns had increased considerably. FDI has slowed down while the current account deficit (CAD) remains high.
They said that unless big-ticket FDI projects get clearance, the situation is unlikely to improve. Members also cautioned against excessive reliance on short-term foreign debt to finance the CAD.
The external members on TAC include Y H Malegam, Rakesh Mohan, Indira Rajaraman, Sudipto Mundle, Errol D'Souza and Ashima Goyal.
First Published: Tuesday, August 21, 2012, 21:55