1. Urjit Patel’s first policy review: RBI cuts repo rate by 25 bps under MPC framework

Urjit Patel’s first policy review: RBI cuts repo rate by 25 bps under MPC framework

The Reserve Bank of India has cut the repo rate by 25 basis points in the first monetary policy review under the MPC.

By: | Updated: October 4, 2016 4:57 PM
RBI Policy, RBI Monetary Policy, RBI Policy Today, rbi policy announcement today MPC or the Monetary Policy Committee is the new framework under which the RBI’s credit policy is decided.

The Reserve Bank of India has cut the repo rate by 25 basis points in the first monetary policy review under the MPC. After the 25 bps rate cut, the repo rate now stands at 6.25%. RBI has also adjusted the reverse repo rate under LAF (Liquidity Adjustment Facility) to 5.75%. All six members of the MPC voted in favour of a rate cut. “The decision of the MPC is consistent with an accommodative stance of monetary policy in consonance with the objective of achieving consumer price index (CPI) inflation at 5 per cent by Q4 of 2016-17 and the medium-term target of 4 per cent within a band of +/- 2 per cent, while supporting growth,” RBI said.

The MPC felt that the sharp drop in inflation reflects a downward shift in the momentum of food inflation – which holds the key to future inflation outcomes – rather than merely the statistical effects of a favourable base effect. “The Government has announced several measures to cool food inflation pressures, especially with regard to pulses. These measures should help in moderating the momentum of food inflation in the months ahead. This has opened up space for policy action, as indicated in the third bi-monthly monetary policy statement,” RBI said.

On balance, the Committee envisages a trajectory taking headline CPI inflation towards a central tendency of 5 per cent by March 2017, with risks tilted to the upside albeit lower than in the second and third bi-monthly monetary policy statements of June and August respectively. RBI maintained the projection of growth of real gross value added (GVA) for 2016-17 at 7.6 per cent, with risks evenly balanced around it.

MPC or the Monetary Policy Committee is the new framework under which the RBI’s credit policy is decided. Today’s bi-monthly credit policy is the first under MPC and incidentally it is also the first policy review of the new RBI governor Urjit Patel. The new governor, Patel, also happens to be the architect of MPC. The central bank’s monetary policy is a complex instrument that is meant to strike a balance between several economic indicators such as inflation, growth, exchange rate, and employment among others.

The MPC is a six-member committee, of which three members are from the RBI, and the other three are appointed by the Central government. The six member panel consists of; RBI governor (presently Urjit Patel), Deputy Governor of the Bank, in charge of Monetary Policy, One officer of the Bank to be nominated by the Central Board, Chetan Ghate, Professor, Indian Statistical Institute (appointed by government), Professor Pami Dua, Director, Delhi School of Economics (appointed by government), and Dr. Ravindra H. Dholakia, Professor, IIM-Ahmedabad (appointed by government).

Also read: What is RBI’s Monetary Policy Committee and how does it work?

Given the crucial task at hand, leaving the monetary policy decision making process in the hands of a single individual sometimes invites severe criticism. Globally, many central banks have therefore adopted the idea of an MPC, hence distributing the decision making power in the hands of a group of experts, instead of only the governor. The MPC met for the first time on Monday, ahead of the policy today, and mer again today to take a final call on interest rates. The MPC has been entrusted with the task of fixing the benchmark policy rate (repo rate) required to contain inflation within the specified target level.

 

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