Minutes of the October 19, 2011 Meeting of the Technical Advisory Committee on Monetary Policy
November, 18th 2011
The Reserve Bank has been placing the main points of discussion of the Technical Advisory Committee (TAC) on Monetary Policy meeting in public domain with a lag of roughly four weeks after its meeting. The minutes of the twenty-fifth meeting of the TAC held on July 20, 2011 were placed in public domain on August 18, 2011. The twenty-sixth meeting of the Committee was held on October 19, 2011 in the run up to the Second Quarter Review of the Monetary Policy 2011-12 on October 25, 2011. The main points of discussion of this meeting are set out below.
2. The TAC members reviewed the recent global and domestic macroeconomic developments. They felt that the global macroeconomic situation continued to be fragile. Most members were not very optimistic about the immediate resolution of the euro area debt problem and felt that the probability of an event shock was high. The policy response by the authorities was too little and too late. The negative impact in the case of an event shock on emerging economies could be serious through the trade, financing and confidence channels. Members expressed concerns over the slow growth in the US. They also observed that the growth was slowing down in emerging market economies (EMEs).
3. Reflecting on the domestic macroeconomic developments, all members felt that the economic growth was moderating. In particular, investment activity was slowing down due to tight monetary policy and several other factors, including global uncertainty and delay in clearing the projects. A concern was also expressed about the service sector, which was showing signs of moderation. Some members felt that exports growth will slow down, going forward, as a result of which trade deficit may widen.
4. All members observed that inflation was a major concern. They also felt that the inflation would not ease immediately. A member observed that the output gap had narrowed down significantly which was reflected in the elevated level of inflation. However, some other members felt that inflation was driven by external/supply side factors and, therefore, the monetary policy tightening was impacting investment and growth and not inflation. In view of slowing global economy, it was expected that the global commodity prices may soften gradually, which should help moderate inflation, going forward. A member felt that a fall in food inflation from past high levels would help moderate inflation expectations. Some members, while suggesting for a pause, felt that the message of the Reserve Banks policy should be hawkish.
5. Some members raised concerns over the high fiscal deficit and the risk of it slipping in the current financial year. This, combined with the increase in borrowings by the Government, will pose a major challenge for liquidity and monetary management for the Reserve Bank.
6. On monetary measures, while one external member suggested an increase in the repo rate by 25 basis points, other five external members were of the view that the repo rate should not be changed. One of the external members suggested an increase in the SLR by 25 basis points, so that the borrowing by banks from the LAF window of the Reserve Bank was curtailed. The member further recommended that the provisioning for standard assets could be relooked to promote investment activity. Another external member suggested a nominal exchange rate appreciation to reduce the cost pressure on the economy.
7. The meeting was chaired by Dr. D. Subbarao, Governor. Other members present were: Dr. Subir Gokarn, Vice-Chairman, Dr. K.C. Chakrabarty, Shri Anand Sinha, Shri H.R. Khan, Dr. Shankar Acharya, Shri Y.H. Malegam, Prof. Sudipto Mundle, Prof. Errol DSouza and Prof. Ashima Goyal. Dr. Rakesh Mohan and Prof. Indira Rajaraman could not attend the meeting. Dr. Mohan submitted his written views. Shri Deepak Mohanty, Dr. Janak Raj, Shri B.M. Misra, Shri Pardeep Maria and Shri Amitava Sardar were in attendance.