RBI reveals inside talk ahead of policy review

Shedding its image of being a closed institution,the Reserve Bank of India has for the first time revealed the minutes of the meeting of the Technical Advisory Committee.

Shedding its image of being a closed institution,the Reserve Bank of India has for the first time revealed the minutes of the meeting of the Technical Advisory Committee (TAC) ahead of its third quarter review of monetary policy on January 25. Though its views are advisory in nature,they are taken into account by the central bank.

The apex bank is known for its closed-door meetings and secret deliberations when it comes to banking operations,forex management and rupee movement. It has now decided to put the discussions of the TAC in public domain with a lag of roughly four weeks after the meeting of the committee.

In its third quarter review on January 25,the central bank had hiked repo and reverse repo rates by 25 basis points. Incidentally,most members of the committee that met on January 19,were of the view that the repo and reverse repo rates be raised by 25 basis points each. The committee was first constituted in July 2005 and is chaired by the RBI governor. The RBIs final decision is in no way constrained by the committees views,making it solely responsible for policy actions.

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In the meeting on January 19,several members of the committee were worried about the high and rising current account deficit,which they felt was not sustainable. The deficit was financed largely by portfolio and other short-term capital flows. They,therefore,expressed concern over the slowdown in FDI flows,especially when these were quite buoyant in other emerging economies. They felt if the global recovery was stronger than expected,it could adversely impact capital flows to India,going forward, it said.

The TAC felt that rising food and energy prices could emerge as a major problem in 2011. It said growth was stabilising,and the main challenge was to manage inflation. A sharp reversal in inflation in December 2010 was a matter of serious concern. Concern was expressed on the upside risks to inflation due to increase in input costs that could translate into increases in output prices, the RBI said.

As the current inflation was being driven largely by structural factors,there was a need to take necessary measures on the supply side besides further monetary tightening. It felt that the long-term solution to the demand-supply imbalance was to improve productivity in agriculture and supply chain management, the RBI said.

WHAT THE PANEL SAID
* One member suggested 50 bps hike in repo and 25 bps increase in the reverse repo
* One member said SLR could be raised and repo facility linked to credit-deposit ratio besides increasing repo and reverse repo by 25 bps. This will reduce banks borrowing capacity and bring in discipline
* Two members said small and managed depreciation in currency could be considered to manage current account deficit
* One member suggested a hike in the cash reserve ratio (CRR) to contain inflation