NEW DELHI: The government appointed three members to the monetary policy committee (MPC), putting the seal on India’s new architecture for setting interest rates and ending the Reserve Bank of India governor’s role as sole arbiter. Its first policy review is scheduled for October 4.
The three are academics — Chetan Ghate, associate professor at Indian Statistical Institute; Pami Dua, director, Delhi School of Economics; and Ravindra H Dholakia, professor of economics at Indian Institute of Management (IIM), Ahmedabad. They will be joined by three Reserve Bank members, making up a total of six, with Governor Urjit Patel having a casting vote. The other two members are R Gandhi, deputy governor in charge of monetary policy, and executive director Michael Patra.
The government nominees will have a four-year term “or until further orders, whichever is earlier”, the finance ministry said, announcing the appointments on Thursday.
Although appointed by the government, the three will function as independent members, a top finance ministry official said. “Nominated MPC members enjoy arm’s-length distance from the government,” the official said.
The new framework should see a lowering of friction that has at times arisen between finance ministry and the central bank, which is often regarded by the government as ignoring the need to nurture growth in the drive to quell inflation.
Rajiv Kumar, who was a member of the panel that picked the three government nominees, said the MPC should take a broad view. “They have a tough task ahead of them,” he said. “They should take real economy issues into account and not view inflation in isolation of other macroeconomic concerns such as employment.”
The committee will be guided by the consumer inflation target the government has set in discussion with the RBI — 4% with a margin of two percentage points for the five years ending March 2021.
The next monetary policy review will also be the first after Patel took over as governor from Raghuram Rajan earlier this month.
Expectations are that the policy rate will be cut by 25 basis points following a sharp moderation in consumer inflation to 5.05% in August from 6.07% in the month before. A basis point is 0.01 percentage point.
The committee will decide interest rates through a majority vote, with each member having one vote. In the case of a tie, the governor has a casting vote. At least four members will have to be present for the quorum to be complete.
Ghate has previously been on the five-member technical advisory committee that the RBI governor consulted ahead of each policy review. He was also a member of the expert group that suggested the switch to a committee-based monetary management system with an explicit inflation target. DK Joshi, chief economist at Crisil, welcomed the diversity on the monetary policy committee.
“It is a rich MPC because it doesn’t comprise pure monetary economists but those with a broad set of experiences,” said Joshi. “It is a move towards modernisation of monetary policy making and participatory decision making.”