RBI Governor Raghuram Rajan overruled Technical Advisory Panel, kept rates high

MUMBAI: Reserve Bank of India Governor Raghuram Rajan overruled the majority view of the Technical Advisory Committee on monetary policy and kept interest rate high as he believed that the fall in inflation may not yet be sustained given that food supplies due to patchy monsoon and global factors could turn adverse.
Four of the seven outside members of the committee wanted a reduction in interest rate – with three calling for a 25 basis points cut as there were signs of inflation easing. One of the members said there was a case of reducing it by 50 basis points. The repo rate was kept at 8 per cent in the September 30 policy review. A basis point is 0.01 percentage point.

“According to these members (those who voted for a 25 basis points reduction), since industrial demand is stagnating, some focus on the more pressing need of weak demand and high levels of unemployment would be consistent with fighting inflation,” the RBI said in a statement. “They were of the view that if the pace of disinflation is faster than what is anticipated now, there may be a case for a rate cut, particularly if inflation expectations also soften.”

Governor Rajan is under pressure to lower interest rates since inflationary pressures are easing, but he is wary of doing so given the past experience when the RBI had to reverse its stance. Retail inflation plunged to a low of 6.46 per cent in September, lower than the 8 per cent target for January 2015, and closer to the Jan 2016 target of 6 per cent.

But the catch is once the base effect fades, it is expected to rise again by early next year. In fact, the RBI model forecasts 7 per cent by March 2016, which may be revised lower if commodity prices keep falling. “The medicine (higher rates) seems to be working,” Rajan has said. “The problem is before the patient has run the full course of the medicine, you want to take the patient off the medicine and say let’s take a chance. That is always the danger in Indian policy. We have to have the discipline to stay the course.”

One of the members had suggested a 50 basis points reduction in repo rate since the RBI had already achieved its target. YH Malegam, Dr Shankar Acharya, Dr Arvind Virmani, Prof Indira Rajaraman, Prof Errol D’Souza, Prof Ashima Goyal, and Prof Chetan Ghate are the outside members of the TAC.

“The decrease in policy rate, according to this member, would not damage the inflation path since CPI inflation, excluding food and fuel, had come down and the Reserve Bank had already achieved what it wanted to do in the near term,” the RBI said in a statement.