High inflation forced Reserve Bank of India governor Duvvuri Subbarao to hiked rates against team’s advice of 25 bps hike

MUMBAI: Reserve Bank of India governor Duvvuri Subbarao chose to be guided by his own judgement in going for an aggressive increase in interest rates in July rather than going by the advice of a committee on monetary policy, according to minutes of its meeting released by the central bank on Thursday. In the monetary policy review in July, RBI raised rates by 50 basis points — higher than expected — surprising the market, which was betting on rates going up by 25 basis points.

However,the minutes of the meeting of the technical advisory committee on monetary policy show that none of the members were as hawkish as Subbarao in their suggestions on a rate increase to curb inflation. Other members of the committee, which include deputy governors Subir Gokarn, KC Chakrabarty and HR Khan, former chief economic advisor Shankar Acharya, members of the RBI board YH Malegam and Sanjay Labroo, besides former RBI executive director A Vasudevan and professor Sudipto Mundle, either suggested a raise of 25 basis points or a pause on policy action.

Until this aggressive rate action in July, Subbarao had been criticised by some economists and treasury heads of banks for his babystep approach or a policy of softand-measured rate increases. The minutes of the meeting appear to confirm that Subbarao had shed that approach, adopting a bolder stance to curb headline inflation , which is over 9%. Unlike in the UK, this committee is only advisory in nature.

In the UK, the Bank of England has a monetary policy committee which sets interest rates after voting by members. The Bank of England’s monetary policy committee has representatives from the central bank and four external members appointed by the Chancellor of the Exchequer.