"On monetary policy measures, four of the seven members (Technical Advisory Committee on Monetary Policy) recommended maintenance of status quo in the policy repo rate," RBI said in a statement. (Agencies)
"In their view, though growth and inflation are projected to move down, we still have to guard against high inflation expectations that can destabilize the momentum of the economy," it said.
Moreover, it added, the external front is fragile and warrants that RBI should not do anything that can send wrong signals about our discounting the possibility of capital outflows.
On July 30, RBI chose to keep all key interest rates unchanged amid the depreciating rupee putting pressure on inflation and current account deficit.
Accordingly, the repo rate or the rate at which RBI lends to the system, has been retained at 7.25 per cent and the cash reserve ratio, the amount of deposits banks park with RBI, has been kept unchanged at 4 percent.
The statement further said that one external member was not in favour of any change to the policy rate till the operational architecture, through which monetary policy is steered, goes back to a symmetric corridor within the standing facilities that provides a small window within which overnight rates move.
However, two members recommended a reduction in the policy repo rate by 0.25 per cent to improve sentiment and show sensitivity to growth, it said. At the same time, one member recommended a repo rate increase by 25 basis points given the expectation of higher volatility in the exchange rate in the second half of 2013, it added.
To ameliorate the fund constraints of small scale enterprises, it said, one member suggested that the central bank open a bill discounting window for this sector. Another member recommended that the RBI should show its commitment to growth by reducing the procedural infirmities, specifically those that lead to delays in granting of loans, it said.
The meeting of TAC on monetary policy was held on July 24, in the run up to the first quarter review of the policy. The meeting, chaired by Subbarao, was attended by external members Y H Malegam, Indira Rajaraman, Arvind Virmani, Ashima Goyal and Chetan Ghate. Shankar Acharya and Errol D’Souza, who could not attend the meeting, submitted their written views.
RBI said members were of the view that the global economy remained subdued. Most Members felt that while quantitative easing (QE) in the US cannot continue forever, its withdrawal could well be slow, it said.
In the euro area, it said, the European Central Bank has stressed on its commitment to keep interest rates low for an extended period of time. Only Germany has marginally managed to avert recession.
On growth, it said, assessment of members was that domestic activity has slowed down and industrial production is weak.
The confidence level of investors has worsened and most investment plans have been kept on hold, RBI said, adding that even though firms are cash rich and liquidity is adequate, they are not taking any investment decisions.
Regarding inflation, members were of the view that though the monsoon has been good, inflation facing consumers is still high, it said.
Food prices are still elevated and the food security bill will aggravate food price inflation as it will tilt supply towards cereals and away from other farm produce (proteins), which will raise food prices further, it said.
Fuel under-recoveries are also a consideration, it said, adding, on the other hand, that rupee depreciation has not had much impact on inflation, reflecting weak pricing power of firms.
With global commodity prices low and the output gap negative, it said, members expected inflation to be lower than what it was over the past year.
On risks to inflation, members noted that expectations have not declined significantly and the fear of resurgence of inflation was still high, it added.
On the fiscal front, it said: "Members hoped that the fiscal deficit is reduced in a manner that is not growth punishing, i.e. that capital expenditure should not be cut down. According to them, the real cure was in reducing the revenue deficit and undertaking serious economic reforms."
The members were of the view that developments in the external sector – large current account deficit (CAD) and pressure on the rupee – is the immediate concern that needs to be addressed, it said.
CAD is high and unsustainable, and the net international investment position has worsened by 50 per cent in the last two years, it said. Some members suggested that in these circumstances, RBI should let the real effective exchange rate depreciate to help regain competitiveness that Indian exports have lost.
On the recent measures taken by RBI to contain the exchange market volatility, one member was of the view that since April 2012, the central bank has reduced the policy repo rate by 1.25 percent, CRR by 0.75 percent and SLR by 1 percent and the impact of these measures is still unfolding.
The recent actions of increasing the marginal standing facility rate and squeezing liquidity out of the system are not inconsistent with its long-term commitment on growth, it said.
"On monetary policy measures, four of the seven members (Technical Advisory Committee on Monetary Policy) recommended maintenance of status quo in the policy repo rate," RBI said in a statement.