RBI and the shifting sands of advice..

RBI recently released minutes of Technical Advisory Committee on Monetary Policy for meeting held on October 23, 2013.  I wanted to write a post on how the TAC members have changed their views this time compared to previous meetings.

Manas Chakrabarty of Mint does the job for me. The advisers are perhaps as confused as anyone is on Indian economy outlook.He narrates the tale of how TAC members voted in same quarter policy in 2012 and compares it to the voting pattern this year:

Consider now what happened a year later, on 23 October 2013. The economy had sunk even deeper into gloom. Economic growth for the June quarter was a mere 4.4%, one percentage point lower than where it had been in the June 2012 quarter. Growth in industrial production in August 2013 was just 0.6% from a year ago. But wholesale price inflation, at 6.5% for September 2013, was lower than a year ago, while core inflation was a mere 2.1%. In short, growth was lower than a year back and so was inflation. But the rupee had just recovered from a huge panic and depreciation had been rapid. The repo rate ruled at 7.5% and the CRR was at 4%.
This time too, the committee members were unanimous that growth was weakening. They were again divided on inflation, with some feeling that a good monsoon, soft commodity prices and arresting of rupee depreciation would lower inflation, while others disagreed. This time, the high level of consumer prices was also discussed.
The upshot: four members wanted the repo rate to be raised by 25 basis points, two wanted no change, while one wanted it brought down by 25 basis points. Governor Raghuram Rajan agreed with the majority, raising the policy rate to 7.75%.
Here’s the difference between the two meetings, separated by a year. In October 2012, with wholesale price inflation at 20 basis points below the repo rate, the majority of external members wanted a rate cut, some by as much as 50 basis points. A year later, with WPI inflation at 100 basis points below the repo rate, with a much weaker economy and much lower core inflation, the majority wanted a rate hike. What a difference a change of regime at the central bank makes.
Another addition to Dr Subbarao’s list of woes.
Further, it is possible that TAC has a different outlook now:
Of course, monetary policy has to look not only at current conditions but to the future as well. It’s entirely possible that the committee members expected inflation to come down in October 2012 and expect it to go up now, especially with the prospect of the tapering and further rupee depreciation. It is possible that they are more concerned about the consumer price index, about tackling inflationary expectations and about ensuring positive real rates for savers to make a structural change in the current account deficit. But these concerns did not seem to have prevailed a year earlier.
Finally, take a look at another meeting of the committee two years ago, on 19 October 2011. WPI inflation was a high 9.7% in September 2011 while GDP growth in the June 2011 quarter was 7.5%. The repo rate was at 8.25%, around 150 basis points lower than the inflation rate. What did the external members of the advisory committee advise? Only one of them wanted the repo rate to rise by 25 basis points, while the other five opted for no change. Subbarao raised the rate by 25 basis points on 25 October, ignoring the committee.
Clearly, the majority of the economists on the advisory panel seem to have been behind the curve on a number of things. But that, of course, is a comment best made with 20:20 hindsight.
One hears many members of the panel saying RBI has been behind the curve. Well, the king is as good as his advisers’ advises are….More than RBI being behind the curve, it is how inflation has been ahead of the curve always galloping come what may..
We do not get to know from minutes who voted for what. It will be interesting if RBI decides to put that info too in public domain..

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