The value of the Rupee: update as of July 2015

RBI Watch                                                                                               Indian Rupee

Monetary Policy Committee: interpreting Governor Rajan’s recent remarks on the power of veto

Rajan should also articulate his views on whether RBI should have majority representation on the MPC

RBI Watch                                                                                    Monetary Policy 2015-16

In the meeting with media, after the release of the bimonthly monetary policy statement on August 4, the first question put to Governor Rajan enquired whether the RBI Governor should have the power of veto or casting vote on the Monetary Policy Committee (MPC), that is being proposed to replace the solely Governor-determined rate setting process currently in place in India.

This is what he had to say: “Currently, the situation is the Governor has the veto, i.e., effectively all advice is only advice; ultimately, the decision is the Governor’s. So if we continue to retain a veto, it does not change the current situation, it maintains the status quo. So that is something to keep in mind.”

Earlier before opening the conference to questions he took time out to speak specifically on the MPC. He made it clear that the RBI is in favour of the committee approach to determining policy and enumerated its many advantages

In an interview with the Economic Times (August 5, 2015), Rajan had this to say: “ Now, if you undermine the committee by insisting that the governor has a veto.... there are places where there is veto for the governor, but it is rarely used. If that's the kind of veto, then that is not a bad thing, but, then, if the veto gets used often, that would be no different from the current system.”

It appears that Rajan is not in favour of the power of veto – certainly not on every occasion the MPC takes a round of votes. It seems he could be in favour of a veto as an exception, e.g. once every financial year. Or is this his way of saying the Governor should have a casting vote?

It is perhaps best not to speculate. Let’s wait out the Government’s decision on the MPC.

What about whether the majority of the members of the MPC should be from the RBI? Rajan should articulate his stand on this point. He will enhance his position by doing so, just as he has done by articulating his stand on the committee approach to setting monetary policy.

My views on this are that there should an equal number of members from the RBI and from outside. The Governor should have an additional vote in the event of a tie. 

Third Bi-Monthly Monetary Policy Statement on August 4 , 2015 by Governor Rajan: outlook unchanged, repo rate on hold

Some differentiated bank licenses could be announced this month

RBI Watch                                                                                    Monetary Policy 2015-16

Given no significant change in its economic outlook for 2015-16, national output growth at 7.6% and inflation by January – March 2016 at about 6%, the RBI made no change in the repo rate.

The table below gives the RBI’s key monetary rates and ratios as of August 4, 2015, and the changes over the last one year. 

A 0.75% fall in the repo rate – the rate at which banks borrow from the RBI – and a 1% fall in the statutory liquidity ratio – the compulsory investment by banks in government securities - are the highlights of the last one year. Monetary policy is in an easing mode: the RBI has been making borrowing money cheaper, and encouraging banks to lend more.

In the meeting with media, Governor Rjan revealed his thoughts on the Monetary Policy Committee - more on this in a separate blog, which will come out shortly.

On RBI’s new initiative of Small Finance Banks and Payments Banks, Rajan revealed that he hopes to announce one set of licenses (Payment Bank or Small Finance Banks or both?) by the end of this month. Another positive development was his announcement that RBI and Government are working on a Medium Term Framework regarding the investments by Foreign Portfolio Investors in the bond market.

Monitoring the NaMo Bull Market in Stocks: Update as of July 2015

Indian Stock Market Watch

Please refer to my blog of July 9, 2014 for the original note on using TMV/GNP ratio to gauge whether the market  is cheap or expensive.