RBI rejected advice of external experts on interest rate cut
Quotes

RBI rejected advice of external experts on interest rate cut

Last Updated: Wednesday, November 21, 2012, 21:56
 
 Comment 0
 
RBI rejected advice of external experts on interest rate cut
Mumbai: The Reserve Bank had rejected the advice by majority of external experts to lower the interest rate by up to 0.5 percent in its second quarter review of the monetary policy announced last month.

Ignoring the advice of five out of six external members of the Technical Advisory Committee (TAC), the RBI had decided to keep the interest rates unchanged in the view of high inflation.

RBI in its second quarter monetary policy review on October 30, however, did reduce the cash reserve ratio (CRR), the portion of deposit which banks are required to keep with the central bank, by 0.25 percent releasing Rs 17,500 crore of primary liquidity into the system.

"On monetary policy and liquidity measures, five of the six external members suggested that the Reserve Bank should reduce the policy rate...Of these five members, three recommended a reduction in repo rate by 25 basis points, while the other two suggested a sharper reduction of 50 basis points", RBI said while releasing the minutes of the October 23 meeting of the TAC on Monetary Policy Wednesday.

The external members of the TAC who attended the meeting were Y H Malegam, Indira Rajaman, Sudipto Mandle, Errol D'Souza and Ashima Goyal. Rakesh Mohan had submitted written views.

One of the six external members, RBI said, was of the view that "since inflation expectations are elevated, no change in the monetary policy stance is necessary."

RBI's decision to retain interest rate at the existing level even irked Finance Minister P Chidambaram who had said that "growth is as much a concern as inflation. The government has to walk alone to face the challenge of growth... Sometimes it is best to speak and sometimes it is best to be silent. I think this is a time for silence."

Some members felt that though inflation is sticky, there does not seem to be any evidence of excess demand conditions in any part of the economy, it said.

They were of the view that given the global conditions, it said, commodity prices might not harden further and some softening of food inflation could also be expected because of late revival of the south-west monsoon. These members felt that inflation might soften next year.

On the other hand, some members felt that inflationary expectations are high, it said, adding there are demand side pressures since not only are wages increasing, but also the increase in managerial salaries and salaries of the organised sector is very sharp.

They suspected that wage inflation might go up further and this is the last chance for the Reserve Bank to anchor inflation expectations, it added.

On global macroeconomic outlook, it said, members saw evidence of clear slowdown in the global economy with the European Union in recession, Japan slowing down, and sluggish growth in the US with the danger of fiscal cliff persisting.

Members noted that the IMF has revised its growth projections downward.

According to some members, in China, the slowdown is expected to have bottomed out and there is likelihood of a turnaround in Europe as well.

Notwithstanding the inflationary concerns in China and Singapore, the Members generally felt that despite significant loosening of monetary policy at the global level, global inflation is low, and there is evidence of softening of commodity prices, it said.

On the fiscal front, members welcomed the moves by the government: some improvement in the projected fiscal deficit; renewed attention to better implementation of infrastructure projects; and further liberalisation of foreign investment.

However, members noted that the effectiveness of these measures remains to be seen and will be dependent on the continued determination of the government to persevere with essential measures. Thus, fiscal pressures will continue to contribute to fragility of the economy, members felt.

Members were of the opinion that the external sector continued to remain vulnerable to adverse shocks. Although there is some improvement, the current account deficit (CAD) remains well above comfort levels, it added.

PTI


First Published: Wednesday, November 21, 2012, 21:56


Comments


comments powered by Disqus
John Kery with Indian Biz Honchos
John Kery with Indian Biz Honchos
Honda Mobilio MPV
Honda Mobilio MPV
BRICS Annual Summit 2014
BRICS Annual Summit 2014
Tata Zest Standout Features: In Pics
Tata Zest Standout Features: In Pics
New car launches in July
New car launches in July

Web Wrap
Contact Us : Privacy Policy : Legal Disclaimer
Copyright © Zee Media Corporation Ltd. All rights reserved