The minutes of the latest meeting of the monetary policy committee (MPC) have disclosed a lacuna in the legal framework under which the committee operates.
In the minutes, no member has placed on record his or her vote for the 25 basis points hike in the reverse repo rate that the Reserve Bank of India (RBI) announced on 6 April.
The upshot is that we simply do not know whether MPC voted for the move but didn’t place it on record, or did not vote at all. But then, it’s unlikely that the committee voted but didn’t mention it in the minutes because the reverse repo rate hike was the most significant action taken, given that this is the effective policy rate currently due to the surplus liquidity.
Does MPC have the powers to vote on the reverse repo rate? Logically, the reverse repo rate and the repo rate are both policy rates. However, the notification by the government states clearly, “The Monetary Policy Committee would be entrusted with the task of fixing the benchmark policy rate (repo rate) required to contain inflation within the specified target level." This could mean MPC can vote only on the repo rate and not on the reverse repo rate.
On the other hand, amendments to the Reserve Bank of India Act available on the central bank’s website state that MPC shall determine the policy rate required to achieve the inflation target.
This means that the committee can vote on the reverse repo rate as well, because the policy rate is defined as both reverse repo and repo rate in the same Act.
The resolution statement itself of MPC said that the reverse repo rate hike was in consonance with the decision to narrow the rate corridor. It didn’t mention who can take the decision.
If MPC indeed can vote only on the repo rate, it is clear that it has only one instrument (or half an instrument if we take both the rates together) to fight inflation. It looks a shade unfair since liquidity is such an overriding factor on inflation right now.
Further, even in the case of votes for the repo rate, the minutes contain the statements of only three members out of the six. Pami Dua, director of Delhi School of Economics; Ravindra Dholakia, professor at the Indian Institute of Management Ahmedabad; and RBI deputy governor Viral Acharya do not mention whether they voted for or against the status quo.
So, what do the minutes tell us? They do give us a peek into how each member thinks the path of inflation would be and almost everyone had flagged off concerns in varying degrees, the most forceful being Michael Patra, executive director of RBI, who believes a repo rate hike is warranted to achieve the mandate of 4% inflation. But Patra stopped short of voting for a hike and instead voted for a pause.