The three members to be appointed by the government to the the proposed monetary policy committee (MPC) may be picked up from among the five in the Reserve Bank of India’s (RBI) existing technical advisory committee (TAC). Both in the top echelons and in the search-cum-select committee headed by the Cabinet secretary, the dominant view is that this approach would ensure a smooth transition to the new committee-based process to set interest rates under the inflation-targeting monetary policy framework, a person aware of the matter told FE.
In the six-member MPC, three will be from the RBI, including the governor, who will also have a second (casting) vote, while three external members are likely to be named by the government by the end of the month. The search committee is entitled to recommend three names for each external-member position at the MPC. The source said TAC members would be among the choices it would give the government for manning the MPC in such a way that three of them could find their way into the MPC.
The current members of the TAC on monetary policy are Errol D’Souza, professor at the Indian Institute of Management, Ahmedabad, Shankar Acharya, professor at the Indian Council for Research on International Economic Relations, Arvind Virmani, former chief economic advisor, Ashima Goyal of the Indira Gandhi Institute of Development Research, and Chetan Ghate from the Indian Statistical Institute.
While ensuring continuity in the core team for monetary policymaking and conveying the message to the markets that the RBI’s role is not undermined are the objectives of manning MPC with TAC members, some observers are of the view that the purpose of broadening the talent pool available for deciding on policy rates might not be served under the current thinking.
Meanwhile, Urjit Patel, who took charge as new RBI governor on Sunday from his predecessor Raghuram Rajan, on Tuesday attended office and reallocated the portfolios among the three deputy governors with monetary policy going to R Gandhi. Apart from the governor and the deputy governor (monetary policy), the executive director in charge of the policy (currently, Michael Patra) will be RBI representatives in the MPC.
The MPC, sources said, would be in place by the end of September, enabling it to undertake the policy review slated for October 4.
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 above 6%, at the upper end of the target range. 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, especially given the investment torpor and the GDP growth slowing to 7.1% in the June quarter, few analysts would wager a bet on an immediate rate cut.
The move to induct TAC members into MPC would imply that at least for the time being the government would tread a path closer to what a panel led by Patel had suggested on the structure of the MPC in January 2014. The panel had recommended a five-member MPC, three from the RBI and two external members appointed by the central bank, and the governor having a casting vote.