Minutes of the July 20, 2011 Meeting of the Technical Advisory Committee on Monetary Policy

The Reserve Bank has been placing the main points of discussion of the Technical Advisory Committee (TAC) on Monetary Policy meeting in public domain with a lag of roughly four weeks after its meeting. Accordingly, the minutes of the twenty-fourth meeting of the TAC held on April 27, 2011 were placed in public domain on May 30, 2011. The twenty-fifth meeting of the Committee was held on July 20, 2011 in the run up to the First Quarter Review of the Monetary Policy 2011-12 on July 26, 2011. The main points of discussion of this meeting are set out below.

2. The Committee reviewed the global and domestic macroeconomic developments. It felt that the global macroeconomic situation had worsened with the uncertainty clouding the increase in the US debt ceiling issue and continuing problem in the euro area.  If the US debt crisis was not resolved satisfactorily, it would have serious ramifications for the global economy. They were also concerned that if the euro area sovereign debt problem spilled over to Spain and Italy, the consequences could be serious. While the international commodity prices had softened, the outlook was still uncertain. Members also expressed concerns over rising incipient inflationary pressures in advanced economies, even as the emerging market economies (EMEs) were still battling with high inflation.

3. On the domestic macroeconomic developments, most members observed that investment activity was slowing down due to a variety of factors. However, the overall growth was still strong in comparison with most other EMEs. According to the Committee, inflation continued to be a major concern.  The inflation rate continued to be stubbornly high.  Inflation expectations were high and wages were rising.  This could worsen the vicious wage-prices spiral, which to some extent was already evident. According to some members, inflation was driven largely by cost push factors, which was not amenable to monetary policy action. Most members felt that inflation was expected to moderate, although the risk on the monsoon front remained. In view of global uncertainty and deceleration of domestic economic activity, most members suggested that equal weight be given to the objectives of fostering growth and controlling inflation while formulating monetary policy.

4. Most members felt that there could be a slippage in the fiscal deficit budgeted in the Union Budget  2011-12.  They were concerned that the fiscal situation had placed the entire burden of inflation management on monetary policy.  Uncertainty about the fiscal situation would continue to pose a serious challenge for monetary policy. Some members also observed there had been no major economic reforms in the recent period.

5. On monetary measures, while one member suggested an increase in the repo rate by 25 basis points, two members felt that the increase in the policy rate be avoided, if possible. However, if the Reserve Bank needed to give a signal to the market about its continuing anti-inflationary stance, it could raise the repo rate by 25 basis points. Other four members of the Committee were of the view that the past monetary policy actions had an impact and the transmission was still playing out. In view of this, as also the fact that the uncertainty in the global environment had increased and domestic investment was slowing down, they suggested that the Reserve Bank should follow a wait and watch policy.  Hence, the repo rate should not be changed.  One member suggested an increase in CRR by 25 basis points, segmented in such a way that the long-term investment  was encouraged.  A member also felt that the Reserve Bank could give clear signals of more stringent capital requirements in future, at least for systemically important financial institutions.  

6. The meeting was chaired by Dr. D. Subbarao, Governor. Other members present were: Dr. Subir Gokarn, Vice-Chairman, Dr. K.C. Chakrabarty, Shri H.R. Khan, Dr. Shankar Acharya, Shri Y.H. Malegam, Shri Sanjay Labroo, Dr. A. Vasudevan and Prof. Sudipto Mundle. Prof. Dilip M. Nachane and Prof. Samir K. Barua could not attend the meeting but submitted their written views. Shri Anand Sinha could not attend the meeting. Shri Deepak Mohanty, Dr. Janak Raj, Shri B.M. Misra and Shri Amitava Sardar were in attendance.

Alpana Killawala
Chief General Manager

Press Release: 2011-2012/271