The government on Thursday appointed Chetan Ghate, Pami Dua and Ravindra H Dholakia as external members of the Monetary Policy Committee (MPC) that will set interest rates, heralding a historical change in monetary policy-making in India.
The three academicians will join Reserve Bank of India governor Urjit Patel (chairperson of the panel), deputy governor R Gandhi and executive director Michael Patra to undertake the October 4 policy review. In the six-member MPC, the RBI governor will also have a second (casting) vote to be exercised to break a tie.
Factory output contracted 2.4% in July while retail inflation fell to 5.05% in August, raising hopes for an immediate rate cut by RBI to boost growth.
While Ghate, a professor at the Indian Statistical Institute, is a member of the RBI’s technical advisory committee (TAC) on monetary policy, Delhi School of Economics director Dua and IIM-Ahmedabad professor Dholakia have been part of several RBI and government panels on macro-economic issues. Dua was also a member of RBI’s TAC on leading indicators in 2006-2008.
Since the three are familiar with the RBI functioning, the appointments would ensure a smooth transition to the new committee-based process to set interest rates under the inflation-targeting monetary policy framework. “The search committee had shortlisted six-seven experts in various fields of economics for the three external member posts in the MPC,” a source told FE. From this list, the Appointment Committee of Cabinet headed by prime minister Narendra Modi picked up the above three candidates for the job.
Patel, after taking charge as new RBI governor on September 4 from his predecessor Raghuram Rajan, reallocated the portfolios among the three deputy governors with monetary policy going to Gandhi. Apart from the governor and the deputy governor (monetary policy), the executive director in charge of the policy Patra is the other RBI representatives in the MPC.
While the government and RBI have formally adopted a consumer price inflation target of 4% plus or minus 2% for the period between now and March 31, 2021, inflation is currently around 5%. With a favourable base and a likely cooling of food inflation, the RBI’s internal target of 5% inflation by March 2017 appears to be within reach.
While there is pressure from the government to reduce the borrowing costs of consumers and investors, few analysts would wager a bet on an immediate rate cut.