Rate cut: Economic panacea for all ills?

Rate cut: Economic panacea for all ills?: Quite predictably, a good part of the media and a good number of commentators have applied ornithological metaphors to describe the 25-basis points cut in the policy rate by the RBI in its fourth bi-monthly...

Let MPC evolve

Is refers to the story “Rate cut: Economic panacea for all ills?” (The Hindu, October 24). It is not clear whether the authors did access the minutes of the maiden two day(October 3/4) meeting of the newly constituted Monetary Policy Committee, which, inter alia said: “MPC reviewed the surveys conducted by the Reserve Bank to gauge  consumer confidence, households’ inflation expectations, corporate sector performance, credit conditions, the outlook for the industrial, services and infrastructure sectors, feedback from industry associations and the projections of professional forecasters. The Committee reviewed in detail staff’s macroeconomic projections, alternative scenarios around various risks to the outlook and staff’s quarterly projection model.” Drawing on these and after extensive discussions on  the stance of monetary policy, the MPC adopted the resolution which set out the policy rates, including the policy repo rate which now stands lower by 25 basis points at 6.25 per cent. 

The minutes also carry the individual views of each of the MPC members. The observations like, “…wonders if the MPC felt a need to distance itself from the legacy of Dr Rajan.” and alleging immaturity in MPC’s approach puts the writers in bad light and if someone looks for motives, like the subject having been used to say something they wanted to say about management of NPAs, defending will be difficult.

Monetary Policy Committee was conceived by Financial Sector Legislative Reforms Commission(FSLRC) as one of the many reforms that would finally help Finance Ministry make RBI amenable. Though its brief was to recommend on financial sector legislative reforms, FSLRC concentrated on truncating and weakening Reserve Bank of India. It invented reasons even to change the designation of the head of RBI. But, RBI is a lucky institution. Many things changed by the time the recommendations of
FSLRC were being taken up for implementation. They just became reference points for further action on subjects covered in the report. The two events, the presence of Dr Raghuram Rajan at Mint Road from 2013 to 2016 and the change of guard in New Delhi worked in RBI’s favour.

Thus the Monetary Policy Committee got a makeover as an expert body unburdening the RBI Governor from the individual responsibility to explain every policy decision. Since the time the constitution of MPC was announced, a section of analysts has been apprehensive of MPC dividing itself into Team A(RBI) and Team B (GOI) and voting for constituency interests, making casting vote by Governor essential to take decisions. The professional way in which MPC has conducted itself in its debut meeting as evidenced by the views of  each member on the policy stance, now in public domain, has proved these doomsayers wrong. As it gains more experience and a feel of RBI’s role, MPC will graduate into another strong pillar supporting the central bank.

M G Warrier, Mumbai


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