The thirtieth meeting of the Technical Advisory Committee on Monetary Policy (TAC) was held on October 23, 2012 in the run-up to the Second Quarter Review of Monetary Policy 2012-13 on October 30, 2012. The main points of discussion in the meeting are set out below.

1. Three Members were of the view that the global macroeconomic outlook is gloomy. They saw evidence of clear slowdown in the global economy with the European Union in recession, Japan slowing down, and sluggish growth in the US with the danger of fiscal cliff persisting. Members noted that the IMF has revised its growth projections downward. Two other Members were more sanguine about the global situation. They expected a turnaround to take place in the US as retail sales have increased, housing starts have picked up and treasury yields have fallen. There are chances of growth in Japan two quarters from now, According to these members, in China, the slowdown is expected to have bottomed out and there is likelihood of a turnaround in Europe as well. Notwithstanding the inflationary concerns in China and Singapore, the Members generally felt that despite significant loosening of monetary policy at the global level, global inflation is low, and there is evidence of softening of commodity prices.

2. On the domestic front, Members were of the view that we are passing through a very challenging time. Aggregate demand is weakening, and credit and money supply growth are below the Reserve Bank’s projections. Industrial growth has been more or less stagnant for nearly three quarters, capacity utilization is low, capital goods production has fallen significantly, investment intentions show no signs of revival and the economy seems to be operating significantly below potential. The weak corporate sector was adversely affecting the health of commercial banks in terms of growing non-performing assets. Overall, there is significant slowdown in the Indian economy.

3. Some Members felt that though inflation is sticky, there does not seem to be any evidence of excess demand conditions in any part of the economy. They were of the view that given the global conditions, commodity prices might not harden further and some softening of food inflation could also be expected because of late revival of the south-west monsoon. These Members felt that inflation might soften next year. On the other hand, some Members felt that inflationary expectations are high. There are demand side pressures since not only are wages increasing, but also the increase in managerial salaries and salaries of the organised sector is very sharp. They suspected that wage inflation might go up further and this is the last chance for the Reserve Bank to anchor inflation expectations.

4. On the fiscal front, Members welcomed the moves by the government: some improvement in the projected fiscal deficit; renewed attention to better implementation of infrastructure projects; and further liberalisation of foreign investment. However, the effectiveness of these measures remains to be seen and will be dependent on the continued determination of the Government to persevere with essential measures. At the present juncture, the tax collections are low, subsidy bill is elevated and despite some relief due on spectrum auctions, the likelihood of a fiscal slippage is high. Thus fiscal pressures will continue to contribute to fragility of the economy, Members felt.

5. Members were of the opinion that the external sector continued to remain vulnerable to adverse shocks. Although there is some improvement, the current account deficit (CAD) remains well above comfort levels. Whereas there has been some recovery in capital flows, these flows must be seen as uncertain, given the fragile state of the world economy. The persistently high CAD might be driven by specific relative prices rather than aggregate demand. Some members felt there is room for the real exchange rate to depreciate and every opportunity should be taken to build up forex reserves, which are now below what they were three years ago. Another Member was of the view that imports are not responsive to exchange rate changes and there is little reason to expect much export buoyancy even with more depreciation. As such, the Reserve Bank should leave the exchange rate to be determined by the market as at present, and not intervene to depreciate it further.

6. On monetary policy and liquidity measures, five of the six external Members suggested that the Reserve Bank should reduce the policy rate.They felt that even though inflation is sticky, there are no demand pressures and there is a need to revive investments. One member felt that higher growth would help in reducing the fiscal deficit. Of these five Members, three recommended a reduction in repo rate by 25 basis points, while the other two suggested a sharper reduction of 50 basis points. Among the Members who recommended a repo rate cut by 25 basis points, one Member also recommended a cut in CRR by 25 basis points to help banks bring down lending rates without reducing deposit rates. One of the six Members was of the view that the decline in the growth rate was largely due to fiscal factors; since inflation expectations are elevated, no change in the monetary policy stance is necessary.

7. The meeting was chaired by Dr. D. Subbarao, Governor. Other internal Members present were: Dr. Subir Gokarn, Vice-Chairman, Deputy Governors, Dr. K.C. Chakrabarty and Shri Anand Sinha; and external Members, Shri Y.H. Malegam, Prof. Indira Rajaraman, Prof. Sudipto Mundle, Prof. Errol D’Souza and Prof. Ashima Goyal. Dr. Rakesh Mohan and Dr. Shankar Acharya could not attend the meeting. Dr. Mohan submitted his written views. RBI officials, Shri Deepak Mohanty, Dr. Michael D. Patra, Dr. B.K. Bhoi, Shri B.M. Misra and Shri Pardeep Maria were in attendance.

8. Since February 2011, the Reserve Bank has been placing the main points of discussions of the TAC on Monetary Policy meetings in the public domain with a lag of roughly four weeks after the meeting.

Ajit Prasad
Assistant General Manager

Press Release : 2012-2013/854