Should MPC vote on stance?

By Renu Kohli

The last two monetary policy statements, in April and June, reflect some critical fine-tuning under the new chairperson, Sanjay Malhotra. One, the bullet on monetary policy stance under the sub-head “Monetary Policy Decisions” has been dropped. The words “the decision” make a comeback in the text, replacing its plural “these decisions” as seen in the February statement. The new-look statement places this in the last section, “Rationale for Monetary Policy Decisions”, although it isn’t part of the “Decisions”. Two, there’s no mention if the Monetary Policy Committee (MPC) members voted on the stance. The MPC meeting’s minutes revealed the stance was no more part of the monetary policy “resolution”, and therefore, of the operational framework. Accordingly, members did not vote on “stance” although they continued “extensive discussion” and submitted views in writing.

These changes are substantive and convey the impression that “stance” has been relegated to a lower pedestal as a lever to achieve the medium-term inflation target.

Chairperson’s discretion

What is the legal basis for such critical changes? The Reserve Bank of India (RBI) Act, 1934, does not mention “stance” anywhere. Section 45ZI (10) requires MPC members to vote for a proposed “resolution”, 45ZI (11) to specify reasons. Though the Act does not specify what “resolution” should include, 45ZB (3) mandates the MPC to determine the policy rate, implying this certainly be a part. It is the rules, Section 5(i)d of the RBI Monetary Policy Committee and Monetary Policy Process Regulations, 2016, that state the resolution shall include the policy repo rate, and at the discretion of chairperson, any other monetary policy measures including those relating to the operating framework of monetary policy.

Evolution

The role and significance of “stance” was not so clear in October 2016 when flexible inflation targeting (FIT) began. In the very first statement, the sentence on “stance” was upfront in para 1, immediately after the bullet on repo rate, stating: “The decision (referring to repo rate) of the MPC is consistent with an accommodative stance…”. Para 10 presented voting outcome — all six members voted in favour of the monetary policy “decision”, the singularity most likely referring to rate action and not including “stance”. However, the meeting’s minutes clearly mentioned that “stance” was part of the resolution on which members voted; curiously, none recorded it in their written statement. It was in the December 2016 and February 2017 MPC minutes that we first traced Michael Patra recording his vote for rate and stance, both.

A forensic scan of MPC policy statements and minutes suggests it was rather slow in recognising that transparency required members to clearly state that policy rate and stance were both part of the operating framework with voting rights on each. We found a clear sentence — para 20, MPC minutes, February 2017 (2nd meeting) stating “the committee decided to change the stance from accommodative to neutral”. The subsequent, April 2017 (3rd meeting) MPC statement, para 21, stated the “MPC decided to keep the policy rate unchanged while persevering with a neutral stance”.

Evidently, the MPC had a say in both rate and stance. While sentences about the MPC’s decision on “stance” became a regular feature, ambiguity in language about voting persisted. For instance, the June 2017 disagreement of member Ravindra Dholakia with a consensus view wasn’t clear if he voted against the policy rate decision or stance or both!

Full clarity came in the October 2018 statement which showed separate voting on policy rate and stance. Further refinement in the February 2019 statement transitioned to an independent bullet on “stance” like the repo rate; correspondingly, “the decision” was substituted by plural “these decisions” for both. In October 2024, para 1 featured under “Monetary Policy Decisions”, displaying complete clarity in thinking and communication.

Winning credibility

Thus, it is evident that “stance” was viewed as integral to the “operating framework” from the very beginning and the first chairperson, Urjit Patel, used his discretionary power to make it part of the “resolution” on which all members voted. In fact, voting outcomes on the “stance” from beginning are succinctly documented by the RBI in Reviewing Monetary Policy Framework, 2020-21 (Table III.2). His successor, Shaktikanta Das, continued that practice.

Unfortunately, we do not know what has triggered the current changes.

Under the IT framework, both short-term policy rate and “forward guidance” combine to deliver the maximum punch. In fact, many central bankers have been increasingly leaning towards “forward guidance” to influence future expectations — the insight is that economic decision-taking depends not only on the current short-term rate but also on future rate expectations. Forward guidance is therefore subjected to extensive market scrutiny; emerging literature makes finer distinctions if it’s Delphic or Odyssean! The monetary policy stance embedded in policy statements is the most critical piece of forward guidance. Members take extreme care in crafting the statement on stance, which embodies the committee’s views on macroeconomic developments and its policy orientation, viewed as superior to market assessments. Removing that statement from the policy resolution and framing short-term repo rate as the only decision-making tool in the operating framework to achieve the medium-term inflation target may not be a fair understanding of how it operates.

Central banks work hard to gain credibility and win confidence among markets, businesses, and individuals to be able to influence their decisions. The architects of IT framework have formulated this in terms of an independent institution and a multi-member decision-making process with transparency and effective communication. Imagine a situation where more than two members voted in favour of repo rate decision but expressed strong reservations on policy stance. Even though not a majority, their views are critical from a market perspective. Market expectations begin to form immediately following the governor’s address; those might change after the minutes are made public. The situation could get more complicated if these two hypothetical members expressed their views publicly in between.

Conclusion

Denying voting rights to members on policy stance and not making it public would be like walking back from a successful, eight-year learning process. It carries the risk of policy credibility and undermining transparency. The chairperson should consider if there is merit in restoring the previous format. More importantly, all stakeholders must debate if RBI rules should be amended to put voting on stance on a firmer footing as the second review of FIT framework is due in a year.

The writer is a macroeconomist and former staff, RBI and IMF.

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