The Reserve Bank of India’s liquidity tightening measures to stem the rupee’s fall found little support from its technical advisers on monetary policy which met ahead of the July policy review, minutes of the technical advisory committee (TAC) showed. The committee comprises of the governor, the four deputy governors and seven external members.
While majority backed the RBI’s decision to keep policy rates unchanged, members had divergent views over the liquidity-tightening measures.
The RBI had left policy rates unchanged at the review on July 30 but had taken a series of measures a fortnight before the review to tighten liquidity. The RBI had capped banks’ borrowings from the daily repo tender and had hiked the marginal standing facility (MSF) rate to 10.25%.
Most members agreed that the current account deficit and the pressure on the rupee were of immediate concern. However views on how to protect the rupee varied sharply. Some members felt that the RBI must allow the rupee to depreciate in order to increase competitiveness of the exports.
One member said that the measures went against the RBI’s long-term commitment to growth.
Another member was of the view that instead of these measures, a 100 basis points hike in the policy rate along with a widening of the rate corridor would have worked better, the minutes said.
One member pointed out that by raising the MSF rate, the central bank had increased the width of the rate corridor and thereby implied that it was open for more interest rate volatility. Volatility in the money market distorts the monetary policy signal, affecting its credibility said the member.