The instances when the government condemns the actions of the Reserve Bank of India, that too publicly have been few. But P. Chidambaram, then finance minister — in response to RBI’s decision to keep policy rates stable in October 2012 — rebuked the RBI saying that if the government has to walk alone to face the challenge of growth, then “it will walk alone”.
What happens to interest rates in the country matters to a saver, investor, consumer as well as a borrower and thus has a wide economic and political implication. If the economic growth is weak, most stakeholders including the government wish for a rate cut. RBI being an independent body is more focused on the inflation levels, which often puts it on the cross-roads with the central government.
Before a Monetary Policy Committee (MPC) was constituted in 2016, the final decision on the policy rates was taken by the governor alone. But ever since a six-member committee has been entrusted with the task of deciding on the policy rates, it has, to an extent, ring-fenced the RBI governor from undue pressure from the government. Before we look at what the fist MPC achieved till date and whether it still is relevant, let’s briefly understand what an MPC is and why it was formed.
What is an MPC and what was the mandate given to this committee?
The six-member panel was formed to bring “value and transparency” to rate-setting decisions. The panel consisted of both, government and RBI members. The expert committee under the former governor of RBI, Urijit Patel, had suggested that RBI abandon the ‘multiple indicator’ approach and make inflation targeting the primary objective of its monetary policy.
So was the MPC able to tame inflation?
The MPC may be considered successful in this regard. According to news reports, in the 46 months of its existence, inflation has been within the RBI’s comfort zone — consumer price inflation at 4 per cent (+ or – 2 per cent) for 39 months. The MPC has brought inflation to the forefront of policymaking. Under an MPC, the Indian economy is unlikely to see a repeat of 4 years of double-digit inflation that prevailed between 2010 and 2013
Transparency in the rate-setting process and ‘guidance’
Thanks to the MPC minutes, the public is aware of RBI’s assessment of the economic situation and its mandate. What goes into the decision making is now in the public domain. It also keeps the market participants informed, which builds trust in the entire system.
Earlier in May, governor Shaktikanta Das had said that India’s economic growth rate will remain in negative territory owing to the lockdown enforced after the Covid-19 outbreak. While the investors were unclear amid high uncertainty, ‘guidance’ that is put out in the MPC minutes serves as a concrete and reliable analysis in such times.
Independence of external MPC members
Policy debate between the members makes headlines. Every RBI minutes are put out after a few days of the policy decision. The independence of the external MPC members has been rarely questioned. The reasonable degree of disagreement between them is also evidence that the policy debate within the committee has been healthy. According to news reports, only 9 out of the 23 meetings so far produced unanimous decisions.
MPC utility beyond rate setting
In light of the economic slowdown since 2019, the RBI has not just relied on policy rates to help revive the economic situation in the country. Unconventional measures like standalone reverse repo cut, Operation Twist and targeted long term repo operations had been undertaken, often bypassing the MPC which questions the relevance of an MPC during the current circumstances.
The MPC was constituted with a clear objective in mind: inflation targeting. While the inflation figures in the last four years suggest that the MPC succeeded in its primary objective but the inflation numbers during the last three quarters have been worrying. CPI inflation has breached RBI’s comfort zone in recent months because of which the central bank was not able to slash rates further in order to support growth. RBI after its last MPC meet kept the key repo rate unchanged at 4 per cent in saying that the decision on repo has been taken while ensuring inflation remains within the target.
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