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RBI Meeting Minutes: Don't Cut Rates That Much?


The RBI has released the minutes of the meeting in which monetary policy was discussed in April 2012. I point you to:

5. Most members were of the view that there was a need for heightened vigilance on the external front. The high twin deficits (current account and fiscal) combined with persistently high inflation for about two years have made the economy more vulnerable to external shocks. It was underscored that the Reserve Bank should assign more weight to preserving external stability. Our policy should be more proactive in managing current account deficit (CAD) risks. In this context, some members felt that the reliance on short-term and debt-creating flows be avoided to finance the CAD. Instead, the focus should be on bringing down the CAD to a sustainable level. These members were of the view that in the presence of significant inflation differential between India and the rest of world and subdued capital inflows, the exchange rate should be allowed to depreciate.

6. Members had divergent views on monetary policy and liquidity measures. Of the six external members who attended the meeting, four members suggested that the Reserve Bank should continue to pause. They felt that unless supply side constraints were addressed and relevant measures were taken to revive investment activity, the reduction in the policy rate would not have any impact.Of these four members, one member suggested that the cash reserve ratio (CRR) be reduced by 50 basis points, another member was of the view that the CRR was already at a low level and that it should be used sparingly while the other two members did not suggest any change in the CRR. The other two of the six external members suggested that the policy rate be reduced by 25 basis points. One of them also suggested a reduction in the CRR by 50 basis points. One external member could not attend the meeting.

Firstly, that RBI should be cognizant about the risks to the CAD is good, but they have continued to attempt dollar stability in the face of exits of mammoth proportions, it seems. Just recently they seem to have pumped in $500 million in one day, and are doing two OMO auctions (where RBI purchases government bonds from banks) of 12,000 cr. each. That’s 24,000 cr. (240 billion rupees) that, if you look at the past, might mimic the sales of the dollar by the RBI – that’s about $4.5 billion. Note however that since the RBI meet, the dollar did appreciate, with us hitting the 54 mark again very fast – that means the fall in the rupee must have sparked a change of stance.

Second, the overall feeling was that the RBI was to continue with rates at 8.5% because they thought things couldn’t be improved through the policy rate reduction. This makes no sense; revival of investment activity was not really the aim of reducing interest rates, it was supposedly to counter the lack of growth. (To the layperson: Growth can come from investment, but it can also come from increased consumption, exports or higher government spending – not all are structurally good, of course) But I suppose inflation would have played a part as well.

What can this tell us? That further policy meets might get more and more tough since external members are advising the RBI not to manipulate the dollar-rupee equation, and that the 50 bps cut would have come as a big surprise. Also that there aren’t any government stooges as external members (the government would have demanded a big rate cut).

The meeting had about 5 members from the RBI, six external members and four other RBI attendees. 


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