Electronic consultation with the external Members of the Technical Advisory Committee (TAC) on monetary policy was held between January 23 and 28, 2015 in the run up to the Sixth Bi-monthly Monetary Policy Review of 2014-15 on February 3, 2015. The main points are set out below.

1. A Member noted that there was a global disinflationary environment because of weak global growth. Some Members expressed concern regarding the large scale foreign portfolio investment into India and the consequent build-up of short-term debt. They were of the view that European quantitative easing (QE) could further push capital flows to India. Members, however, felt that the Reserve Bank should continue to build reserves. The consequent expansion of domestic liquidity would help in the monetary policy stance as well. They expressed concern that the European QE in conjunction with the likely normalization in the US monetary policy by June may lead to high volatility in financial markets which can spillover to the foreign exchange market in India with consequent volatility in the exchange rate.

2. On the domestic front, Members noted that while there was an improvement in the economic situation with a revival in service sector growth and better corporate results, industrial performance, particularly consumer durables and manufacturing, continued to be weak. Also, service sector growth was expected to slow as the Government cuts plan expenditure to meet fiscal deficit targets. A Member noted that the new GDP series may alter the GDP absolutes as also the growth rates in recent quarters; however, the current indications were that the economy is stagnating.

3. Most Members noted the decline in inflation in recent months at a faster clip than the glide path, driven largely by food and oil prices. While there is uncertainty about oil prices, particularly the growing wedge between prices of global crude and domestic fuel, prices of a number of commodities are expected to remain soft. However, a few Members expressed concern about the stickiness of core inflation. A Member noted that even as the Reserve Bank’s survey showed that inflation expectations had softened considerably, further declines may occur at a relatively moderate pace.

4. On the external sector, Members expressed concern regarding continued overvaluation of the rupee, which hurts the financial health of the external sector, besides weakening the competitiveness ofthe tradable sector, including manufacturing. Members expressed concern on the fall in export growth. A Member said that the longer this overvaluation persists, the greater are the dangers of protectionist actions through trade/industrial policies. Another Member noted that there were no major BoP risks at the current juncture.

5. On policy action, four of the seven external Members recommended no change in the policy repo rate. The Members opined that there was no noticeable change in the environment since the policy rate action of mid-January 2015. Further action should be only after the Union Budget was presented so that there was clarity on measures proposed to increase potential output and on fiscal consolidation, which would anchor inflation expectations. Of these four Members, one recommended that the statutory liquidity ratio (SLR) may be cut by 50 basis points, while another recommended a 100 basis points reduction. Three Members recommended that the policy repo rate be reduced. Two Members suggested a reduction by 25 basis points. According to these Members, the trend reduction in inflation and inflation expectations has been in excess of the glide path. Therefore, a 25 basis points reduction is necessary before pausing to watch food inflation. Also, since lower credit growth was not compensated by increased issuance of commercial paper, it has been suggested that credit is being priced too high in relation to its supply. One Member recommended a sharp reduction of 75 basis points in the policy rate as the economy is stagnating and is in urgent need of a monetary policy push.

6. All the seven 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 – sent their feedback through e-mail.

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.

Sangeeta Das
Director

Press Release : 2014-2015/1801