After the appointment of government nominees to the monetary policy committee (MPC), the spotlight now shifts to how exactly this panel will work
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| Urjit Patel (RBI) governor |
With the appointment of government nominees,
the committee that will decide India’s monetary policy is in place. Now, the
spotlight shifts to how exactly this panel will work.
Pami Dua, director of the Delhi School of Economics; Chetan Ghate,
a professor at the Indian Statistical Institute, and Ravindra Dholakia, professor
of economics at the Indian Institute of Ahmedabad, join Reserve Bank of India
(RBI) governor Urjit Patel, deputy governor R. Gandhi and executive director
Michael Patra on the committee.
While RBI has a history of working with the technical advisory
committee (TAC), the terms of engagement with the new monetary policy committee
(MPC) will be different.
For one, unlike TAC, where the voting was anonymous, the MPC
framework requires the central bank to share the minutes of the MPC meeting, 14
days later.
These minutes will include details of how each member voted and
also their statement justifying the reasons for voting in favour or against a
resolution.
“It has become very onerous for external members now as
these statements will be made public,” said Indira Rajaraman, an economist and
a member of the technical advisory committee. Just like the technical advisory
committee, MPC external panellists are also part-time members, appointed for
four years. Second, this greater accountability requires MPC members to
meet regularly
The amended RBI Act prescribes at least four meetings a year.
TAC used to meet once in a quarter and for about three hours, wrote Ashima Goyal, economist and TAC member in a 19
September Mint op-ed.
Note that established policy boards such as the ones in Bank of
England meet at least eight times a year and members receive an extensive staff
briefing on the economy a week prior to the policy day.
Their meetings, too, go on for days, like for instance, the
two-day conferences of the US Federal Reserve Open Market Committee.
Third, sharing of information to external members will also be key
to informed decisions. One complaint among TAC members was their limited access
to information, according to a top RBI official speaking on condition of
anonymity. The amended RBI Act says MPC members can now request at any time,
“additional information, including any data, models or analysis”.
Fourth, the role of the central bank governor and her/his deputies
will also change under the new regime. In the past, the governor just had to
listen and act independently.
A Mint story showed that rate
decisions under governor Raghuram Rajan’s tenure were not in accordance with
the majority TAC view most of the time. But any disagreement with MPC members
will have a larger implication for policymaking.
A market participant said on condition of anonymity that any dissonance
in the views of MPC members and the governor could spell uncertainty and
disturb the markets.
“The TAC was advice, and after that the governor and the
finance minister did as they liked. The MPC is an executive body. It makes the
decision,” said Ajay Shah, economist and researcher at the National Institute
of Public Finance and Policy.
According to the monetary policy framework, agreed by RBI and the
government last year, the central bank will look to contain inflation within a
band of 4% plus/minus 2 percentage points. The amended RBI Act says that the
panel “shall determine the policy rate required to achieve the inflation
target”.
Will the MPC start functioning before the 4 October policy review?
We
will know by 27 September since RBI will have to publish the schedule of
meetings at least one week before the first meeting for the year.
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