RBI technical committee advises caution on rate cut before budget
26 February 2015
A meeting of the Reserve Bank of India's (RBI) technical advisory committee today said any action on the policy rate front should be taken only after the union budget was presented so that there was clarity on measures proposed to increase potential output and on fiscal consolidation, which would anchor inflation expectations.
Four of the 7-member technical committee, which advises the central bank on policy actions, recommended no change in the policy repo rate at least for now, as there was no noticeable change in the environment since the policy rate action of mid-January 2015.
''Further action should be only after the union budget was presented so that there was clarity on measures proposed to increase potential output and on fiscal consolidation, which would anchor inflation expectations,'' they said.
The members advised RBI to build its forex reserves to ward off the adverse consequences of the European quantitative easing (QE) that could further push capital flows into India. The QE along with the normalisation of the US monetary policy by June may lead to high volatility in the financial markets that could spill over to the foreign exchange market with a consequent volatility in the exchange rate.
On the domestic front, members noted that while there was an improvement in the economic situation with a revival in service sector growth and better corporate results, industrial performance, particularly consumer durables and manufacturing, continued to remain weak.
Most members noted the decline in inflation in recent months at a faster clip than the glide path, driven largely by food and oil prices. While there is uncertainty about oil prices, particularly the growing wedge between prices of global crude and domestic fuel, prices of a number of commodities are expected to remain soft.
However, a few members expressed concern about the stickiness of core inflation. A member noted that even as the RBI's survey showed that inflation expectations had softened considerably, further declines may occur at a relatively moderate pace.
On the external sector, members expressed concern regarding continued overvaluation of the rupee, which hurts the financial health of the external sector, besides weakening the competitiveness of the tradable sector, including manufacturing. Members expressed concern on the fall in export growth. A member said the longer this overvaluation persists, the greater are the dangers of protectionist actions through trade/industrial policies.
The seven external members of the committee are YH Malegam, Shankar Acharya, Arvind Virmani, Indira Rajaraman, Errol D'Souza, Ashima Goyal, and Chetan Ghate.