Home / Industry / Banking /  New-look MPC may stick to tried path

The Reserve Bank of India’s reconstituted monetary policy committee (MPC) is expected to continue its accommodative stance when it meets for the first time this week to decide on key policy rates.

The three-day meeting of the MPC has been rescheduled for 7-9 October, RBI said on Tuesday.

The meeting, which was supposed to take place from 29 September to 1 October, was postponed because of a delay in the naming of three external members of the rate-setting panel.

Analysts said the appointments of Ashima Goyal, Jayanth R. Varma and Shashanka Bhide, announced late Monday night as the monetary policy committee’s new external members for the next four years, are aimed at ensuring continuity in monetary policy amid a contracting economy.

Economists said the government’s choice of Varma, an expert in financial markets, along with senior economists Goyal and Bhide, showed the importance of financial markets in policy transmission.

“Varma has played a very large role in the development of the financial markets and has been on numerous committees. He has also been on the board of a private sector bank, which gives him a first-hand understanding of how banks work and their challenges," said a person, a senior economist at private sector bank, on condition of anonymity.

Varma’s presence on the monetary policy committee will take the role of external members beyond academic insights and into a more tangible territory of ground-level insights. He has written about, how despite policy rate cuts, lack of transmission has offered little help to the real economy.

Among the three, the views of Goyal and Varma are the most well known. And while Goyal is seen as dovish in her stance, Varma is viewed as ‘neutral-to-dovish’. Both have argued against excessive monetary policy tightening in targeting inflation. Bhide, who comes from the National Council of Applied Economic Research, a New Delhi-based non-profit think tank of economics, is a renowned expert in agri-economics and has been brought in to keep the focus on rural economy, the experts said.

“Overall, we believe that the new external members are more neutral-to-dovish in their policy views, which will tilt the overall MPC in a dovish direction. However, we do not expect any immediate impact on policy, given the current high levels of inflation," Nomura said in a note on Tuesday. Goyal, a professor at Indira Gandhi Institute of Development Research, is part of the shadow monetary policy committee constituted by economic policy think tank EGROW foundation. During a meeting held on 23 September, she had called for a pause in rate action. “It is important to continue anchoring inflation expectations, so a pause is called for at present. But clear communication is required that the inflation spike is temporary, and will be looked through, that RBI will remain accommodative— as long as it takes for growth to revert to potential—which is likely to be longer since the virus has turned out to be persistent," Goyal had said.

Nomura also pointed out that governor Shaktikanta Das is known for his dovish stance and executive director Mridul Saggar is seen to be neutral. That leaves deputy governor Michael Patra as the only hawk in the committee.

“They (MPC members) are likely to be vocal on liquidity, credit market dynamics, and may not shy away from advocating for RBI to look at unconventional or untested measures," the Nomura note added.

That said, economists agree that the new members may have strong views on liquidity and financial markets, but the remit of the MPC is limited to repo rate action. Majority of economists are expecting a policy pause on 9 October, with the continuation of an accommodative policy stance owing to inflation remaining above RBI’s upper tolerance bound of 6%. Moreover, the market will be keenly waiting for the minutes of the MPC meeting to get a better sense of their views and to forecast future rate actions.

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