ूेस ूकाशनी PRESS RELEASE भारतीय िरज़वर् बैंक संचार िवभाग, केंिीय कायार्लय, एस.बी.एस.मागर्, मुंबई‐400001 _____________________________________________________________________________________________________________________ DEPARTMENT OF COMMUNICATION, Central Office, S.B.S.Marg, Mumbai‐400001 फोन/Phone: 91 22 2266 0502 फैक्स/Fax: 91 22 22660358 RESERVE BANK OF INDIA : www.rbi.org.in/hindi Website : www.rbi.org.in इ‐मेल email: helpdoc@rbi.org.in वेबसाइट October 22, 2014 Minutes of the September 24, 2014 Meeting of the Technical Advisory Committee on Monetary Policy The thirty-seventh meeting of the Technical Advisory Committee (TAC) on monetary policy was held on September 24, 2014 in the run up to the Fourth Bi-monthly Monetary Policy Review of 2014-15 on September 30, 2014.The main points of discussion in the meeting are set out below. 1. Some Members viewed the global recovery as less dynamic than six months ago, with signs of recovery in the US, but weaker growth in Japan, the Euro area and China. Accordingly, overall global growth will remain below potential. To that extent, the demand for Indian exports would be moderated. Other Members felt that constraints from global developments have eased somewhat. They underscored the need to monitor the divergence in cross-country business and monetary policy cycles, given that the US is about to exhibit a stronger recovery in growth, while Japan, China and Euro area may sustain or even expand quantitative easing. Given that the Indian growth cycle may be more synchronised with the US cycle, these Members were of the opinion that India could actually benefit from a stronger revival in US growth, because the beneficial effects through higher trade and investment will possibly, at least partially, offset the adverse impact of expected capital outflows in response to eventual tightening of monetary policy by the US Federal Reserve (Fed), particularly in view of the fact that markets may have already factored in some part of the Fed’s expected actions. 2. On the domestic front, Members noted that while market sentiment has improved, economic activity continues to be weak and there is disconnect between corporate sector activity and buoyancy in the capital market. The pick-up in real GDP growth in Q1 of 2014-15 was primarily due to a favourable base effect. In Q2, the base effect will turn unfavourable and growth could register a fall and may remain below potential for some time to come. There is uncertainty on growth in agriculture due to the uneven temporal and spatial distribution of rainfall. Industrial activity has slumped after some initial gain, stalled projects are yet to be brought back on-stream, and there is no pick-up in investment as companies are risk averse and services sector growth outlook is unclear with mixed signals. 3. Some Members derived comfort from the recent decline in inflation. Food inflation, after remaining sticky in double digits, has come down due to supply management by the Government, lower increases in the minimum support prices, and moderation in real wage growth. CPI inflation excluding food and fuel has also fallen, indicating that there is no persistent excess demand in the economy. They expected inflationary expectations of households would see a sharp drop, if food prices correct. Other Members stressed that disinflation – from the stand point of monetary policy – should be seen as a clear change in the trend rate of inflation. Enduring disinflation is welfare enhancing in the long run, notwithstanding the transitional costs during the period of sustained disinflation. They cautioned that a backward looking inflation expectations formation process can endanger the inflation situation by making it inertial. Therefore, if the Reserve Bank’s inflation 2 targets are not firmly believed by the public, anchoring inflation expectations will be difficult. In view of the adaptive nature of inflation expectations, there is an even stronger case for forward looking monetary policy statements. One Member noted the sharp decline in wholesale price inflation. While the gap between wholesale and retail price inflation continued to remain wide with an increase in the retail margin, going forward, the margin will reduce and the gap would close. 4. On external sector risks, Members were of the view that the current account deficit has widened somewhat, though it remained lower than its level last year. Favourable external factors are: (a) more stable nature of capital flows; (b) softer commodity prices; and (c) signs of revival in the US economy. The key downside risks, however, are eventual tightening by the Fed and geo-political developments. If, because of a sudden change in risk appetite after the Fed tightening, the exchange rate becomes volatile again, then this will require careful management. If the interest rate differential turns adverse for India, some more depreciation of the rupee may be accepted. They advised the Reserve Bank to be alert on the exchange rate front, with watchfulness on the movements in the nominal and real effective exchange rates. 5. On policy action, three of the seven external Members recommended no change in the policy repo rate. With a weak domestic and world economy, moderating inflation, oil prices trending downwards, commodity prices past their super cycle, there was a case for easing the policy rates and helping growth. Yet, they voted against a cut in the repo rate in this policy announcement. They were of the view that if the pace of disinflation is faster than what is anticipated now, then there may be a case for a rate cut, particularly if inflation expectations also soften. One of these three Members recommended that the statutory liquidity ratio (SLR) may be cut by 100 basis points so as to raise the credit-deposit ratio while being consistent with the fiscal consolidation path. Four Members recommended that the policy repo rate be reduced. Three of the four Members suggested a reduction by 25 basis points. According to these Members, 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. With the decline in headline CPI inflation, the real policy rate has become positive. Positive real rates were required by the Reserve Bank to meet its 6.0 per cent target by January 2016. If inflation reduces further, the real policy rate will keep on increasing. Therefore, they were of the view that at this juncture, the Reserve Bank can afford a reduction in the repo rate by 25 basis points. One Member recommended a sharper reduction of 50 basis points in the policy repo rate with an emphatic forward guidance that there will be no further follow up of the rate cut. 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. 6. The meeting was chaired by Dr. Raghuram G. Rajan, Governor. Internal members: Dr. Urjit R. Patel (Vice-Chairman), Shri Harun R. Khan, Shri R. Gandhi, and Shri S.S. Mundra, Deputy Governors; and external Members: Shri Y.H. Malegam, Dr. Shankar Acharya, Dr. Arvind Virmani, Prof. Indira Rajaraman, Prof. Errol D’Souza, Prof. Ashima Goyal, and Prof. Chetan Ghate were present in the meeting. Officials of the Reserve Bank Shri Deepak Mohanty, Dr. Michael D. Patra, Shri B.M. Misra, Dr. B.K. Bhoi and Dr. G. Chatterjee were in attendance. Since February 2011, the Reserve Bank has been placing the main points of discussions of the meetings of TAC on Monetary Policy in the public domain with a lag of roughly four weeks after the meeting. Press Release : 2014-2015/839 Alpana Killawala Principal Chief General Manager