Investment banks and rating agencies have termed the recommendations of the Urjit Patel committee on the monetary policy framework as “hawkish” that can keep interest rates at the current high levels.
If the Reserve Bank of India accepts the recommendations of the Patel committee, interest rates are unlikely to come down in 2014-15 even if the RBI removes its current restriction on bank borrowing through the repo window, says a study by rating agency Crisil.
The committee, which released its report on Tuesday, has recommended that RBI should bring down CPI inflation to 8 per cent over the next 12 months, and to 6 per cent over the next 24 months before formally adopting the recommended target of 4 per cent inflation with a band of plus or minus 2 per cent. It also proposed using CPI inflation as the new nominal anchor, as it is the closest reflection of cost of living and inflation expectations.
The committee has also advocated that the real policy rate should be positive, implying that the repo rate (currently at 7.75 per cent) should be higher than the expected CPI inflation (expected to average around 8.5 per cent in 2014-15). “In other words, there is little scope for monetary policy to boost growth in 2014-15,” Crisil said.
“These recommendations clearly carry hawkish implications. After all, the December headline CPI rate of 9.9 per cent is well above the current 7.75 per cent repo rate. In other words the real policy rate is negative at a time when inflation is above even the temporary 8 per cent target rate,” global brokerage Credit Suisse said in a note.
However, some experts believe the panel recommendation for adopting monetary policy which is centred on inflation will be a shift from traditional policymaking and will also bring RBI policy calibration closer to the international practises. “We see the RBI’s shift to inflation targeting as a step in the right direction. The time span over which it can be achieved will vary according to a number of factors, such as the rains or the global growth cycle or oil prices,” Bank
of America Merrill Lynch said in a report.