How MPC changes the policy game

MPC has been tasked with deciding benchmark interest rates, which the RBI governor did so far

For the first time, a monetary policy committee (MPC), and not just the Reserve Bank of India governor, is taking a call on policy rate. Like the Federal Open Market Committee of the US, the MPC is meeting for two days before it announces its rate decision today. Anup Roy tells us how such committees function in some major central banks

THE MONETARY POLICY COMMITTEE IS AN executive body of six members that will decide on policy rate for the Reserve Bank of India (RBI). Three members are from the central bank and three others are nominated by the government. All members will have a vote each, but in case of a tie, the RBI governor has a casting vote to break the tie. The MPC will meet for two days before deciding on rates.

THE MEMBERS FROM THE CENTRAL BANK are RBI governor (Urjit Patel), deputy governor in charge of monetary policy (R Gandhi) and an RBI-nominated executive (Michael Patra, RBI executive director). The other three members are nominated by the government. Currently, the three external members are well esteemed academicians — Chetan Ghate, Pami Dua and Ravindra H Dholakia. These external members will hold office for four years.

THE MANDATE OF THE COMMITTEE is to keep inflation within the central point of 4% for the next five years, while keeping growth considerations in mind. The tolerance band for inflation is 2% on both sides of the central point. If the targets are not met for three consecutive readings, the MPC will have to give in writing to the government why it failed to meet the desired objective.

THE MPC IMPROVES TRANSPARENCY and brings a collective approach to the inflation problem. According to the mandate, the MPC will have to release the minutes of the meetings 14 days after the meet, which are expected to reveal how a member voted and why.

THE RBI WILL LOSE ITS DISCRETION TO SURPRISE the market with out-of-policy rate actions. Such surprises are considered a potent weapon in its arsenal. But the RBI is left with enough means to surprise and even shock the market, if it really wants to.

MAJOR GLOBAL CENTRAL BANKS

United States: The FOMC consists of 12 members — the seven members of the Board of Governors of the Federal Reserve System; the president of the Federal Reserve Bank of New York; and four of the remaining 11 Reserve Bank presidents, who serve one-year terms on a rotating basis. The Federal Reserve controls the three tools of monetary policy — open-market ops, the discount rate and reserve requirements.

Bank of England: The eight-member MPC meets 12 times a year. Each member has one vote. The mandate is price stability, with inflation target of 2%. The committee is responsible for taking a call on quantitative easing.

European Central Bank: It has a six-member executive board, including president of the central bank, vice-president and four others. The Governing Council is the main decision-making body, which comprises six executive board members of ECB and the 19 governors of the national central banks of the euro area.