January 28 rate hike: Raghuram Rajan went against majority view yet again

MUMBAI: Reserve Bank of India governor Raghuram Rajan had rejected the Technical Advisory Committee’s majority view of “status quo” on rates ahead of the monetary policy review last month, according to minutes of the committee.

In January, the RBI raised the repo rate, or the rate at which it lends to banks, by 25 basis points to 8 per cent, amid rising prices and continuing slump in economic growth. The minutes of the committee, released by the RBI on Monday, show that only two members of the TAC on monetary policy had suggested that the central bank should raise key policy rates.

While four other members suggested a status quo, one member suggested that the central bank should cuts rates. Those in favour of a rate hike had backed their view saying the Consumer Prices Index (CPI) inflation, excluding food and fuel, was flat and that WPI inflation, excluding food and fuel, had risen.

To address the elevated levels of inflation expectations, the Reserve Bank should not wait for stability in the political situation to emerge, they had suggested. As per their assessment, all estimates indicated that the output gap in India is minimal.

Also, inflation is persistent, despite a low output gap, possibly due to elevated and sticky inflation expectations, they added. They referred to the conundrum posed by high CPI core inflation coexisting with the negative output gap, and cautioned that when the economy recovers, there could be an upward pressure on inflation.

Members who suggested a status quo on rates felt that given the political uncertainty and that growth is already weak, a 25 bps increase in the repo rate may not have much impact on inflation, unless a longterm path is chalked out.

The meeting, chaired by Rajan, included deputy governors Urjit Patel, KC Chakrabarty and HR Khan (internal members), and YH Malegam, Indira Rajaraman, Shankar Acharya, Arvind Virmani, Ashima Goyal, Errol D’Souza and Chetan Ghate (external members).