So what went on behind the scenes before Reserve Bank of India (RBI) Governor Duvvuri Subbarao announced the monetary policy for 2013-14 on 3 May?
A meeting of the Technical Advisory Committee (TAC) that met a week before the policy seems to have been vertically split between those who wanted the RBI to not only cut the repo rate, but also the cash reserve ratio (CRR) to improve liquidity and give growth a leg up.
Subbarao, however, only cut the repo rate by 25 basis points (one quarter of one percent), even though he had strong words about being watchful on inflation and the current account deficit.
The TAC, which has seven external members apart from RBI Deputy Governors and officials, had three external members rooting for monetary easing, while the other four held firm on no rate cuts.
Subbarao final decision to go with the minority view suggests that he took a middle-of-the road position. TAC’s views are not binding on the Governor.
According to the minutes of the TAC meeting held on 25 April, and released today on the RBI website, the three monetary policy doves recommended a 25 basis points cut in the repo. Two of them wanted an additional CRR cut, and one of them even suggested a cut in the statutory liquidity ratio (SLR).
The other four external TAC members were against a rate cut. They argued that reducing the repo rate may not help revive growth since the slowdown is the result of impediments to investments in projects. They felt that investments would not be sensitive to a rate cut, and pointed out that very little of the 100 basis points cut in the repo rate since last April had so far percolated to borrowers. Banks swallowed the cuts.
These four members, the RBI minutes disclose, felt that the RBI could “wait for at least one quarter to gauge the evolving the macroeconomic situation” before easing up.
Since the Governor did opt for a repo cut and not a CRR cut—preferring to ease liquidity through open market operations instead—the question that arises is this: does this mean the June policy statement won’t have any further cheer for banks or borrowers?
The betting must be on a do-nothing June policy since four members wanted to wait till the quarter was over, and Subbarao has already front-loaded the repo cut in May.
The hawkish sentiment, this time, seems to be driven by a majority of the external members in TAC, and not the Governor himself, despite his strong words in the policy.
The meeting was chaired by Subbarao, and attended by Deputy Governors Urjit Patel, KC Chakrabarty, Anand Sinha and Harun R Khan, and seven external members: YH Malegam, Indira Rajaraman, Shankar Acharya, Errol D’Souza, Ashima Goyal, Arvind Virmani and Chetan Ghate.