Dawn of a new era?

For the first time on Tuesday, the six-member Monetary Policy Committee (MPC) will decide whether the Reserve Bank of India should cut its policy rate. Until this year, the lending or policy rate was decided solely by the Governor in consultation with a technical advisory committee (TAC). But unlike the MPC, the TAC did not have statutory status and hence the governor was under no compulsion to accept its recommendations. Since its introduction in 2009, the TAC’s role in formulating the policy rate has been minimal. 

In other words, the RBI has rarely followed through on the TAC”s suggestions. But this dynamic changed with the constitution of the MPC. Its sole task will be to target inflation. The committee is made up of three members from the RBI, including the Governor, and three nominated by the government. It will meet at least four times a year and publicise its decisions after each meeting.  Unlike the previous arrangement, the RBI Governor will not have veto powers. But he will have a casting vote in the event of a tie. Under previous RBI Governor Raghuram Rajan, the RBI has admittedly shown a great deal of independence from political and corporate pressure.

But a model where the RBI Governor is the sole arbitrator of a nation’s monetary policy does not leave the institution in good health. Under the revised MPC, the committee’s recommendations will be binding, leaving the institution in a better shape, and not at the discretion of one individual. There is a growing perception that RBI Governor Urjit Patel will follow previous incumbent Raghuram Rajan’s mission of not comprising with any attempt to reduce inflation. 

It is, however, difficult to pinpoint his exact views, as he hardly offered his views as Deputy Governor at the post-policy press conference during the previous incumbent’s tenure. With three members nominated by the Centre and Patel’s ties with major corporate and the establishment cutting across political lines, there are questions whether the MPC will be beholden to vested interests. One of Rajan’s great qualities as RBI Governor was his ability to withstand pressure from corporate interests and political animals within the establishment to frame India’s monetary policy. With the MPC yet to convene and present its outlook, only time will tell.  

At this juncture, one is bound to ask whether the RBI will cut its policy rate.  Many business dailies have asserted that there is bound to be a rate cut in the near future. The last time the RBI cut its policy rate was in April by half a percentage point to 6.5 percent. 

Since April, the RBI has prudently not reduced its policy rate any further after fears of growing inflation. From April till July, retail inflation rose from 5.39 percent to 6.07 percent. In August, however, it dropped to 5.05 percent. Some have predicted that this figure may further fall to 4.5 percent in September-October. With the economy in dire need for a cash injection to kick-start growth and India on course to bring retail inflation below 5 percent by March 2017, the clamour for a cut in its policy will only grow louder.        


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