 "RBI takes Fed route on monetary policy")
The Reserve Bank of India (RBI) will now walk the Federal Open Market Committee (FOMC) way of deliberating on monetary policy for two days before delivering their verdict.
And so, the six-member monetary policy committee (MPC) will be meeting on October 3 and 4, before letting the markets know about their collective decision on policy rates at 2.30 pm on the second day, just an hour before the equity markets close, but well before the closure of the bond and currency markets at 5 pm. So far, the central bank conveyed its decision at 11 am on the policy day. Aided by RBI's research team and advised (non-binding) by a committee of experts on monetary policy, the governor had the last say on policy.
The resolution of the MPC will be placed on RBI's website at 2.30 pm on October 4. This would be followed by a press conference at 2.45 pm, RBI said on its website. The three external members of the MPC are Chetan Ghate, professor, India Statistical Institute; Pami Dua, director, Delhi School of Economics; and Ravindra H Dholakia, professor, Indian Institute of Management (Ahmedabad). They will hold office for a period of four years, or until further orders.
"It remains to be seen if with a two-day deliberation in place, if the frequency of the monetary policy is sustained as it is," said SBI chief economist Soumya Kanti Ghosh.
Ghosh also pointed towards an interesting paper on committee-led monetary policy by American economist Alan Blinder where he proved that even in a committee approach, the governor always prevails.
In his paper, Blinder had this to say on the FOMC meetings: "The distinction between individual and group decision making, while clean in theory, can be fuzzy in practice. Many central bank policy boards do not reach decisions by literal majority vote. Committees have chairmen, who may dominate the proceedings," the paper 'Monetary Policy by Committee: Why and How' says.
"On paper, the FOMC was always a pure committee that reached decisions by majority vote. In practice, each member other than Alan Greenspan had only one real choice when the roll was called: whether to go on record as supporting or opposing the chairman's recommendation, which was certain to prevail. It therefore was (and still is) quite possible for the Fed to adopt one policy even though the (unweighted) majority favoured another," Blinder said.
Since this is the first time such a meeting is happening, there is a huge interest about the proceedings and every sentence of the policy will be dissected by the analyst community. It is not yet clear if the minutes of the meetings will be made public with the opinions of individual members in it, or the minutes will be heavily edited and the member names would be omitted like the current practice for the technical advisory committee meetings.
"There will be element of curiosity as this is the first such policy. If you get the minutes, you get the point of view of individual members and the meetings become more institutionalised. Overtime, you extrapolate the views and come into a reasonable conclusion," said Harihar Krishnamurthy, head of treasury at First Rand Bank.
"In any case, the meetings will be data dependent. Even as not all data points can be traced to a uniform outcome, the inclusion of six independent members make the process more transparent and the outcome less surprising, which is good for the markets," Krishnamurthy said.
According to Yogesh Radke, head of quantitative research at Edelweiss Securities, the timing of the policy will not be a problem. "Typically, news gets impacted immediately so it won't impact much if the announcement is made at 11 am or 2.30 pm. Any news flow during the market hours gets absorbed with less impact. If any significant announcement is during non-market hours, we see gap-up or gap-down opening," said Radke.
"We have witnessed good long rollovers in PSU banks and Bank Nifty in the Oct Expiry. Traders are largely positioned on the long side in anticipation of a rate cut. We expect the RBI to cut rates and come with a dovish statement," Radke said.
SHARPER DELIBERATIONS
Since it is a two day meetings, the quality of deliberations can be expected to improve. The committee members, for sure, will delve deeply on the trajectory of CPI inflation as they are committed to keep the inflation within a central point of 4 per cent. Issues like inflows from foreign investors, and the impact of that flow following global central banks' stand on monetary policies will be discussed in greater depth. While European Central Bank and Bank of England and Bank of Japan have explicitly committed on easy money policy, the US Federal Reserve is expected to hike rates.
Global commodity prices and the impact of oil production cut by OPEC will find its place in the discussion because 70 per cent of India's import is oil. Domestic liquidity, impact on inflation due to vegetable and pulse prices, monsoon and the prospect of kharif and rabi crops will be discussed and so will be the spike in rural consumer demand due to better monsoon.
Economists also expect the academicians to deliberate on minimum support prices on agri products and the procurement part. Tepid economy and the prospect of lower credit growth due to lack of capex demand would be discussed. The central point could still be how the RBI will manage the banking sector liquidity after the rupee equivalent of $26 FCNR deposit related outflows will be critically examined.
The central bank has already purchased Rs 1 lakh crore of bonds from the secondary market and the market expects it to buy another Rs 1 lakh crore in the coming months to tide over the possible liquidity deficit. The members will surely deliberate whether a rate cut would be warranted before negotiating the impending liquidity related crisis in the system. As any rate cut at this point will go waste if the liquidity remains tight.
And so, the six-member monetary policy committee (MPC) will be meeting on October 3 and 4, before letting the markets know about their collective decision on policy rates at 2.30 pm on the second day, just an hour before the equity markets close, but well before the closure of the bond and currency markets at 5 pm. So far, the central bank conveyed its decision at 11 am on the policy day. Aided by RBI's research team and advised (non-binding) by a committee of experts on monetary policy, the governor had the last say on policy.
The resolution of the MPC will be placed on RBI's website at 2.30 pm on October 4. This would be followed by a press conference at 2.45 pm, RBI said on its website. The three external members of the MPC are Chetan Ghate, professor, India Statistical Institute; Pami Dua, director, Delhi School of Economics; and Ravindra H Dholakia, professor, Indian Institute of Management (Ahmedabad). They will hold office for a period of four years, or until further orders.
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But with the monetary policy in place, the central bank governor will be just one of the six members, albeit with a casting vote in case of a tie in member votes. This is exactly what the FOMC does in case of US Federal Reserve meetings, but the key difference is that the FOMC meets once in a quarter and the RBI's practice is to meet twice in a quarter. The frequency of the meeting changed several times under different governors, and it won't be surprising if the central bank goes back to the old practice of holding policy meetings once a quarter, say economists.
"It remains to be seen if with a two-day deliberation in place, if the frequency of the monetary policy is sustained as it is," said SBI chief economist Soumya Kanti Ghosh.
Ghosh also pointed towards an interesting paper on committee-led monetary policy by American economist Alan Blinder where he proved that even in a committee approach, the governor always prevails.
In his paper, Blinder had this to say on the FOMC meetings: "The distinction between individual and group decision making, while clean in theory, can be fuzzy in practice. Many central bank policy boards do not reach decisions by literal majority vote. Committees have chairmen, who may dominate the proceedings," the paper 'Monetary Policy by Committee: Why and How' says.
"On paper, the FOMC was always a pure committee that reached decisions by majority vote. In practice, each member other than Alan Greenspan had only one real choice when the roll was called: whether to go on record as supporting or opposing the chairman's recommendation, which was certain to prevail. It therefore was (and still is) quite possible for the Fed to adopt one policy even though the (unweighted) majority favoured another," Blinder said.
Since this is the first time such a meeting is happening, there is a huge interest about the proceedings and every sentence of the policy will be dissected by the analyst community. It is not yet clear if the minutes of the meetings will be made public with the opinions of individual members in it, or the minutes will be heavily edited and the member names would be omitted like the current practice for the technical advisory committee meetings.
"There will be element of curiosity as this is the first such policy. If you get the minutes, you get the point of view of individual members and the meetings become more institutionalised. Overtime, you extrapolate the views and come into a reasonable conclusion," said Harihar Krishnamurthy, head of treasury at First Rand Bank.
"In any case, the meetings will be data dependent. Even as not all data points can be traced to a uniform outcome, the inclusion of six independent members make the process more transparent and the outcome less surprising, which is good for the markets," Krishnamurthy said.
According to Yogesh Radke, head of quantitative research at Edelweiss Securities, the timing of the policy will not be a problem. "Typically, news gets impacted immediately so it won't impact much if the announcement is made at 11 am or 2.30 pm. Any news flow during the market hours gets absorbed with less impact. If any significant announcement is during non-market hours, we see gap-up or gap-down opening," said Radke.
"We have witnessed good long rollovers in PSU banks and Bank Nifty in the Oct Expiry. Traders are largely positioned on the long side in anticipation of a rate cut. We expect the RBI to cut rates and come with a dovish statement," Radke said.
SHARPER DELIBERATIONS
Since it is a two day meetings, the quality of deliberations can be expected to improve. The committee members, for sure, will delve deeply on the trajectory of CPI inflation as they are committed to keep the inflation within a central point of 4 per cent. Issues like inflows from foreign investors, and the impact of that flow following global central banks' stand on monetary policies will be discussed in greater depth. While European Central Bank and Bank of England and Bank of Japan have explicitly committed on easy money policy, the US Federal Reserve is expected to hike rates.
Global commodity prices and the impact of oil production cut by OPEC will find its place in the discussion because 70 per cent of India's import is oil. Domestic liquidity, impact on inflation due to vegetable and pulse prices, monsoon and the prospect of kharif and rabi crops will be discussed and so will be the spike in rural consumer demand due to better monsoon.
Economists also expect the academicians to deliberate on minimum support prices on agri products and the procurement part. Tepid economy and the prospect of lower credit growth due to lack of capex demand would be discussed. The central point could still be how the RBI will manage the banking sector liquidity after the rupee equivalent of $26 FCNR deposit related outflows will be critically examined.
The central bank has already purchased Rs 1 lakh crore of bonds from the secondary market and the market expects it to buy another Rs 1 lakh crore in the coming months to tide over the possible liquidity deficit. The members will surely deliberate whether a rate cut would be warranted before negotiating the impending liquidity related crisis in the system. As any rate cut at this point will go waste if the liquidity remains tight.