EXPERTS ADVISE RBI NOT TO HIKE RATES TO REIN IN INFLATION

Almost all external experts on the Reserve Banks’ monetary policy advisory committee were opposed to increase in policy rates to combat inflation amid concerns that tight policy had proved ineffective in moderating price rise.

“On monetary measures, while one external member suggested an increase in repo rate by 25 basis points, other five external members were of the view that repo rate should not be changed,” said minutes of October 19 meeting of RBI’s Technical Advisory Committee (TAC) on Monetary Policy.

Six days later, the central bank increased the repo rate by 25 basis points in its bid to tame inflation. It was the 13th increase since March 2010.

While all members of the committee chaired by RBI Governor Mr D Subbarao observed that inflation was a major concern, they said it would not ease immediately.

”... 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,” the minutes said.

Besides top RBI officials, the TAC comprise external members, including Hangar Acharya, Rakesh Mohan and Errol D’Souza.

The members, however, hoped in view of slowing global economy, the international commodity prices would soften gradually and help in moderate inflation.

Some others, while suggesting for a pause in hike in further hike in interest rates, felt that the message of the Reserve Bank’s policy should be hawkish.

In its second quarter mid-quarter review of the monetary policy for the current fiscal, RBI indicated that it may not increase the key policy rates in December.

Amidst global developments, the TAC members also observed the economic growth in the country was moderating.

In particular, investment activity was slowing down due to tight monetary policy and other factors, including global uncertainty and delay in clearing the projects, they felt.

RBI has lowered its GDP projection for the current fiscal to 7.6 per cent from 8 per cent.

A concern was also expressed during the TAC meet on 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, the central bank said.

The minutes further said that some members raised concerns over the high fiscal deficit and the risk of it slipping in the current financial year.

SOURCE: http://www.thehindubusinessline.com/industry-and-economy/banking/article2635971.ece