The biggest change in the Reserve Bank of India’s (RBI) eight-decade history promises to soothe what was often a fractious relationship between the central bank and government.
Prime Minister Narendra Modi’s administration on Thursday announced three candidates to join an equal number of RBI representatives on a new monetary policy committee (MPC), paving the way for India’s first collective interest-rate decision. The move frees the governor from facing the brunt of criticism from the government, which has historically held contradictory demands of lower borrowing costs as well as a tight rein on inflation.
Moreover, since the panel will be guided by an inflation target cemented into law last month, its technocrats in the financial hub of Mumbai will be empowered to stand up to pressure from their bosses in the political capital New Delhi. The MPC’s first test could come as early as 4 October, when the central bank is scheduled to next review monetary policy.
“It will set the ball rolling for transparency and continuity in monetary policy making,” said Soumya Kanti Ghosh, an economist at State Bank of India, the country’s largest lender. “They will be dictated more by realities on the ground rather than anything else, and if the reality on the ground is any indication, I don’t think the rate should go lower from this level.”
Academics Chetan Ghate, Pami Dua, and Ravindra Dholakia will be among members who will need to take this decision. They will join RBI governor Urjit Patel, his deputy in charge of monetary policy, and another central bank executive on the six-member MPC. Each will have a vote with Patel holding an additional tie-breaker, though he won’t be able to veto a majority decision.
While 4 October would mark Patel’s first rate review as governor, his predecessor Raghuram Rajan — who together with Patel had spearheaded the RBI’s overhaul — was accused by members of Modi’s government of keeping borrowing costs too high. The criticism was despite battling some of Asia’s steepest price pressures.
The previous governor too had similar conflicts with Modi’s predecessor, and at least two of the RBI’s 24 chiefs had resigned due to differences with the government. So, while not much is known about the policy bias of the new MPC members, Modi’s moves to elevate Patel to the top job and ensure that the MPC is free of government employees are therefore “quite sensible,” according to Sunil Kumar Sinha, an economist at New Delhi-based India Ratings and Research Pvt., the local unit of Fitch Ratings.
“They are giving a clear signal to the market that the overall decision taken by the MPC will not be driven or guided by the thought process of the government,” Sinha said.