MPC: Back on track

After an avoidable delay, the government on Monday appointed external members to the Reserve Bank of India’s (RBI’s) monetary policy committee (MPC), and the new rate-setting committee will meet between October 7 and 9 to review the policy. While the government has restricted its choice of panel members to academia, it has done well to maintain a diversity of interests.

Jayanth Varma, an expert in finance, was a member of the board of the Securities and Exchange Board of India. He has been engaged in policy work in financial markets and has served on a number of expert committees. The research of Ashima Goyal, who has also served on the Prime Minister’s Economic Advisory Council, is currently focused on fiscal and monetary policies, flexible inflation targeting, and exchange rate, among other things. She was also a member of the technical advisory committee of the RBI, which used to advise the governor on policy before the adoption of the flexible inflation-targeting framework and constitution of the MPC to make monetary policy decisions. Besides, she has been a regular commentator on policy issues. For instance, in a newspaper article published in August, Dr Goyal argued that the RBI should look through the current spike in consumer inflation caused by temporary supply disruptions. Shashanka Bhide’s research has covered a number of areas in macroeconomic modelling, infrastructure, poverty analysis, and agriculture.

The new MPC members will thus bring divergent views to policymaking through their considerable research in the fields of macroeconomics, financial markets, and agricultural economics. This will certainly add value to the committee’s deliberations. For instance, the central bank has struggled in forecasting food prices, which has a very high weighting in the consumer price index, and is critical for monetary policy setting. Further, the transmission of policy has been a major issue. Dr Varma had argued in favour of open market operations in the past to bring down bond yields. Thus, it would be interesting to see the inputs and voting decisions of the new members. However, as things stand today, most economists expect the MPC to keep the policy rate unchanged for now. Inflation continues to remain above the RBI’s target band. The markets will expect the central bank to publish its inflation and growth forecast for the coming quarters, which it has avoided since the outbreak of the pandemic. The central bank’s forecast will also indicate the possibility of policy accommodation in the current cycle.

There is no doubt that it would be difficult for the MPC to cut rates in the near-term if inflation continues to surprise on the upside. Even if it cuts the policy rate to support economic activity, it may not have the desired impact because of uncertainty on account of inflation and fiscal policy. Further, the RBI also has to deal with excess capital flows. It would need to continuously intervene in the market to contain unnecessary currency appreciation, which can affect India’s external competitiveness. However, this will add rupee liquidity to the system and can affect inflation outcomes. All this and the possibility of another fiscal stimulus will need to be factored in when the MPC takes its rate decision on Friday.


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