The Reserve Bank of India’s (RBI) decision to maintain status quo in the first quarter monetary policy review last month was in keeping with the majority view of its technical advisory committee (TAC), the central bank has said.
In a statement issued by it in Mumbai, the RBI said that Governor D Subbarao moved with the majority opinion of TAC members in the light of prevalent internal and external economic situation. “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,” the RBI statement said.
In their view, though growth and inflation are projected to move down, we still have to guard against high inflation expectations that can destabilise the momentum of the economy, it said. Moreover, it added that 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 per cent.
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.