Minutes of the April 1, 2015 Meeting of the Technical Advisory Committee on Monetary Policy

The thirty-eighth meeting of the Technical Advisory Committee (TAC) on monetary policy was held on April 1, 2015 in the run up to the First Bi-monthly Monetary Policy Review of 2015-16 on April 7, 2015.The main points discussed at the meeting are set out below.

1. Members noted that global growth remained tepid and divergent. While high frequency indicators point to slowdown in China, growth in the US may face headwinds due to appreciation of the US dollar. Activity in the Euro area, particularly Germany, is expected to pick-up supported by low oil prices, extension of quantitative easing and depreciation of the euro; the caveat is how Greece will manage its increasingly strained public finances. The risks to the global outlook are the timing of normalisation of interest rates by the US Fed; larger than expected slowing down of China; concerns on secular stagnation; mounting geopolitical tensions in the middle-east region and reversal of crude oil prices if and when it occurs.
2. Members deliberated at great length on the GDP series revised by the Central Statistics Office in January 2015 estimating real growth in 2014-15 at 7.5 per cent. Most of the Members concurred that it was a challenge to understand the growth momentum under the revised series as all other indicators being tracked by analysts do not show that promising level of activity. The methodological note on compilation of national accounts was silent on the method of connecting the current series with past data. In the absence of rebased past data they felt constrained in estimating potential level of growth, assessing the state of the business cycle, or making projections. Members said that, given the puzzles posed by the new GDP, one might have to shoot in the dark while recommending anything for monetary policy.
3. Members felt that the general level of activity in the economy is still very low and except for power transmission/distribution and railways, no significant improvement is seen in other sectors. Agricultural growth may be impacted by unseasonal rains that have damaged rabi crops on the back of an already lowered estimate of foodgrain production. Unlike the new GDP, IIP data seem to be in sync with other key indicators such as credit growth and auto sales. Some Members were of the view that there were signs of recovery, with pick-up in the services sector purchasing managers’ index, capital goods production exhibiting the fastest growth in seven months, and Labour Bureau’s quarterly survey showing improvement in employment. However, Members believed that recovery in growth may gain traction only slowly and improvement in GDP during 2015-16 may not be more than 0.5 per cent over the current level as downside risks to growth are still high.
4. On inflation, Members derived comfort from the recent broad-based decline in inflation. Members assessed that the CPI headline inflation may average 5.5 per cent in 2015-16. Although the near term outlook for inflation remained benign, deriving comfort from soft crude oil prices, monsoon uncertainties may create an upside risk to the inflation path. A Member felt that the level of inflation expectations in the economy is still high.
5. Members noted that the current account deficit remained below 2 per cent of GDP for six consecutive quarters on account of a low trade deficit and expected that it may fall further with a pick-up in services exports following the US recovery. They expressed concerns about the near-term external outlook as merchandise export growth had been declining for three months in a row and vulnerability in the medium-term was arising from swings in capital inflows in both debt and equity markets. Members felt that though stability of the rupee may be beneficial, the present level of the exchange rate is not attractive and the rupee should be allowed to depreciate. Since the rupee has appreciated significantly against the euro, India’s share of exports in the Euro area may have fallen relative to South Asian countries where currencies have remained fairly stable.
6. On policy action, four Members recommended reduction in the policy repo rate. Of them, two Members suggested a 50 basis points cut along with forward guidance of no further decline. According to these two Members, the current monetary policy stance was tight, causing deceleration in real private consumption demand. Indicators such as weak IIP growth, low capacity utilisation and stressed profitability of the corporate sector indicate that high interest rates are choking demand in interest-sensitive sectors such as automobiles, housing, retail and real estate, while the real appreciation of the rupee is adversely affecting globally connected corporates. They were of the view that a decrease in interest rates would stimulate the interest-sensitive sectors of the economy and enable depreciation of the exchange rate, thereby helping the globally connected sectors. The two Members who recommended a decrease in the policy repo rate by 25 basis points felt that the inflation excluding food and fuel has declined. Moreover, there has been a substantial drop in inflation expectations, and the current food induced inflation is temporary, warranting a policy rate reduction. However, given the uncertainties regarding the path of the fiscal deficit, the monsoon, and the way the US Fed will announce increases in its policy rate, the policy rate reduction ought to be by 25 basis points and not 50 basis points. They were of the opinion that front-loading of policy rate cuts would remove some of the expected asset appreciation that is driving in large debt flows.
7. Three Members recommended no change in the policy repo rate. They were of the view that until the two 25 basis points cuts in the repo rate, in January and March 2015 are transmitted into lending rates, no further cut is desirable. They emphasised that simultaneous monetary and fiscal easing was a major risk and found the desire of some Members to frontload cuts rather puzzling. The third cut in the interest rate may wait at least till August after the monsoon impact is known. They wanted that the centrality of inflation in a flexible inflation targeting framework be recognised in the Reserve Bank’s forward guidance. The current level of the repo rate at 7.5 per cent is near neutral (assuming neutral real rate of 2 per cent and likely inflation of about 5.5 per cent), leaving little room for easing. As growth picks up, the neutral rate may increase, which would provide less space for a rate cut unless inflation declines further. One Member stated that to the extent aggregate demand is assessed to be weak, it would be more effective, at present, to ensure a modest real depreciation of the rupee, which would both improve the external trade balance and increase aggregate demand. One of the Members who recommended no change in the policy repo rate suggested that the statutory liquidity ratio (SLR) be reduced by 50 basis points.
8. 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 Dr. Michael D. Patra, Dr. B.K. Bhoi and Dr. Himanshu Joshi 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.

Alpana Killawala
Principal Chief General Manager