Fourth
Bi-Monthly Monetary Policy Statement due on October 4, 2016
Monetary Policy 2016-17
One element of
uncertainty appears to have been removed when a month ago government appointed
Dr. Urjit Patel, then Deputy Governor of the Reserve Bank of India, as the
replacement for Governor Rajan. Dr. Patel has been closely associated with the
RBI’s move towards inflation targeting. While only time will tell whether he
carries the same zeal for controlling inflation as Rajan, I would suspect that
at least initially he will follow the same course.
The key policy rate
– the repo rate – will now be set by the Monetary Policy Committee (MPC) by a
cast of votes. The uncertainty regarding how rate setting by the Monetary
Policy Committee will influence the course of the current monetary policy
remains. Three outside members have been announced: Pami Dua, Chetan Ghate and
Ravindra Dholakia, all academics. The other three members are from the RBI,
with Governor Patel having a casting vote.
My own sense is
that all three RBI members will vote in line with each other – RBI careerists
typically don’t rock the boat. That being so and with Governor Patel having the
casting vote in the MPC, I see the will of the RBI prevailing.
Yet, it will be
interesting and significant to see the voting pattern of the outside members of
the MPC - we have no clue as to their thinking, and it will take some time
before a steady pattern emerges about their stance on monetary issues.
What is the course
the RBI members prefer? One, they would like to keep the real interest rate in
the region of 1.5%- 2%. Could Governor Patel change the stance on this? This is a
possibility, but to my mind possibly not for now. Two, if there is no drastic
change for the better (the last monetary policy statement suggested some
worsening) in the course of inflation for the rest of the financial year – 5%
by March 2017 – keep rates on hold.
If RBI members vote
straightaway for a reduction in the repo rate, based on my current reading of
the data, my view is that the RBI would lose some credibility on its recently
gained inflation fighting credentials.
