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Thursday, August 22, 2013

RBI left key rates unchanged based on majority view of advisory panel

Reserve Bank of India Governor D. Subbarao chose to go with the majority opinion of the external members of the monetary policy advisory panel to maintain status quo on interest rates at the first quarter review of monetary policy last month.

Four of the seven members recommended maintenance of status quo in the policy repo rate (the interest rate at which banks borrow short-term funds from RBI by pledging government securities). Currently, the repo rate is at 7.25 per cent,

The minutes of the meeting of the Technical Advisory Committee on Monetary Policy, released by the RBI, said, “In their (members) view, though growth and inflation are projected to move down, we still have to guard against high inflation expectations that can destabilise the momentum of the economy.

“Moreover, the external front is fragile and warrants that we do not do anything that can send wrong signals about our discounting the possibility of capital outflows.”

Exchange rate

The members were of the view that developments in the external sector — large current account deficit (CAD) and pressure on the rupee — are the immediate concerns that need to be addressed.

The CAD, which arises when a country’s total import of goods, services and transfers is greater than its exports, is high and unsustainable, and the net international investment position has worsened by 50 per cent in the last two years.

Some members suggested that under these circumstances, the RBI should let the real effective exchange rate depreciate to help regain competitiveness that Indian exports have lost.

On external risks, some members were of the view that markets are forward looking and have already factored in the impact of tapering of quantitative easing by the US.


Members were of the view that though the monsoon has been good, inflation is still high. Food prices are still elevated and the food security Bill will aggravate food price inflation as it will tilt supply towards cereals and away from other farm produce (proteins), which will raise food prices further. Fuel under-recoveries are also a consideration.

Source: thehindubusinessline


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