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RBI’s TAC on Monetary Policy had suggested avoiding hike in rates

19 Aug 2011 Evaluate

The Reserve Bank of India’s Technical Advisory Committee (TAC) on Monetary Policy chaired by the Governor D Subbarao has the opinion that government’s fiscal situation has put burden of controlling inflation on the RBI’s Monetary Policy. The government is targeting to restrict fiscal deficit to 4.6% of GDP in 2011-12 from 4.7% achieved in last fiscal year.

'Most members felt that there could be a slippage in the fiscal deficit budgeted in the Union Budget 2011-12. They (members) were concerned that the fiscal situation had placed the entire burden of inflation management on monetary policy,' the RBI said in minutes of TAC on Monetary Policy meeting. The RBI’s TAC on Monetary Policy meeting, was held in the backdrop of first quarter review of the monetary policy announced in July.

On the issue of the global situation, the TAC had expressed concern over the debt crisis in Europe and United states. “Members also expressed concerns over rising incipient inflationary pressures in advanced economies, even as the emerging market economies (EMEs) were still battling with high inflation” the RBI minute said.

As per the TAC, inflation remained to be a major concern. The inflation rate continued to be stubbornly high. Inflation expectations were high and wages were rising. This could worsen the vicious wage-prices spiral, which to some extent was already evident, the minute said.

Given the present global scenario and slowdown in the investment and economic growth rate, TAC members has the view that the RBI should maintain balance between controlling inflation and formulating monetary policy.

On the issue of the monetary policy measure, four TAC members has suggested a pause in the hike for 26 July quarterly policy review, whereas two members were recommended to increase its policy rates by 25 basis points to give a signal to the market about its continuing anti-inflationary stance. And one member suggested increasing CRR by 25 basis points. However, RBI increased its short term leading and borrowing rates by 50 basis points in first quarter monetary policy review.
 
The RBI’s TAC has no voting rights and it has purely advisory role. The final decision on increase/decrease rates are taken by the RBI Governor.

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