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ूेस ूकाशनी PRESS RELEASE भारतीय िरज़वर् बैंक संचार िवभाग, केंिीय कायार्लय, एस.बी.एस.मागर्, मुंबई‐400001 _____________________________________________________________________________________________________________________
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वेबसाइट
October 22, 2014
Minutes of the September 24, 2014 Meeting of the
Technical Advisory Committee on Monetary Policy
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 inflation
2
targets 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 (c) 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 the repo 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.
Press Release : 2014-2015/839
Alpana Killawala
Principal Chief General Manager