New Delhi: The government has named three outside experts as members of the Monetary Policy Committee (MPC) of the Reserve Bank of India (RBI), moving to a model followed in the developed world.
The six-member MPC—the other three members are from RBI—will conduct its first monetary policy review on 4 October, Urjit Patel’s first as RBI governor.
The Appointments Committee of the Cabinet on Thursday approved the names of Chetan Ghate, a professor at Indian Statistical Institute; Pami Dua, director at Delhi School of Economics (DSE); and Ravindra Dholakia, professor at Indian Institute of Management, Ahmedabad, as MPC members.
“Ghate and Dua were chosen because they are macro-economists of repute. Dholakia was selected because we needed somebody who has a broader view on issues related to agriculture, poverty and food inflation as the challenges before the committee will be diverse,” a person involved in the process of selecting the experts said on condition of anonymity.
Ghate was part of the Technical Advisory Committee on monetary policy to RBI while Dua runs a leading indicator project at DSE.
The experts will serve for four years and are not eligible for re-appointment.
The members of the committee from RBI are governor Patel, deputy governor R. Gandhi, who is also in charge of the monetary policy, and executive director Michael Patra. The RBI governor will have a casting vote in case of a tie.
The MPC framework replaces the current system where the RBI governor and his internal team have complete control over monetary policy. While a committee advises RBI on monetary policy decisions, the central bank is under no obligation to accept its recommendations.
The US and the UK, too, have similar panels in place, with representation from both the central bank and the government.
The preamble in the RBI Act, as amended by the Finance Act, 2016, now provides that the primary objective of India’s monetary policy is to “maintain price stability, while keeping in mind the objective of growth”.
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Economist Indira Rajaraman ,who was a member of the Thirteenth Finance Commission, said she expects decisions in the MPC to be taken in unanimity and without any discordant voices. She, however, cautioned that if the current cycle of low oil and commodity prices comes to an end, high volatility, especially in oil prices, could pose a challenge to the MPC in meeting the inflation target.
The appointment of the MPC may have implications for monetary policy, Sonal Varma and Neha Saraf, economists at Nomura Research, said in a note to clients on Thursday. “The coming 4 October monetary policy meeting could now be MPC based, although this is not yet confirmed and could be a challenge because of the very few days left before the next policy meeting. In our view, all three selected external members are reputed academicians and will be seen as credible and independent experts,” they said.
RBI is now required to publish a monetary policy report every six months explaining the sources of inflation and the forecasts of inflation for the period between six to 18 months.
If RBI fails to meet the inflation target, it shall, in the report, give reasons for failure and remedial actions as well as estimated time within which the inflation target shall be achieved.
The MPC will strive to ensure that the inflation target decided by the government and the central bank is met. RBI has the mandate to adopt a retail inflation target of 4%, plus/minus 2 percentage points on either side, till 31 March 2021.
The US Federal Reserve sets its benchmark rate—the Fed funds rate—through the Federal Open Market Committee (FOMC). The FOMC has seven board members, appointed by the US President and confirmed by the US Senate. The governor of the Federal Reserve is appointed for 14-year terms for the sake of continuity. The chairperson and the vice-chairperson are appointed for four years each. In addition, there are five members—regional reserve bank heads—who serve on FOMC by rotation.
The Bank of England’s MPC has nine members. This includes the governor, three deputy governors and the chief economist of the central bank. The remaining four members are appointed by the UK’s chancellor of the exchequer.
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The idea of a monetary policy committee was proposed by an RBI-appointed committee led by Patel, then a deputy governor of RBI, in February 2014. That panel had recommended a five-member committee, on which three members would be from RBI and two external members would be appointed by the RBI governor and the deputy governor. It was also suggested that the governor would have a casting vote in case of a tie.
The issue took a controversial turn after the government put out a draft Indian Financial Code in July 2015, suggesting a different composition of the committee. The code, which the government later distanced itself from, suggested a seven-member committee, with four members being appointed by the government.
After discussions, the finance ministry and RBI agreed on a six-member MPC that addressed earlier concerns of excessive government influence over monetary policy in the country.
The government, however, has reserved the right to send its views to the monetary policy committee, if needed.
“The central government may, if it considers necessary, convey its views in writing to the Monetary Policy Committee from time to time,” said the Finance Bill.