Reserve Bank's monetary policy decision to be announced on Friday

With three external members of MPC appointed, the committee will meet from October 7 to October 9

With the government filling up the vacancies for three external members of the monetary policy committee (MPC) on Monday night, the Reserve Bank of India (RBI) said the panel would hold meetings from Wednesday to Friday to arrive at a policy decision.

The government named Jayanth Varma, professor at the Indian Institute of Management, Ahmedabad; Ashima Goyal, former member of the Economic Advisory Council to the Prime Minister; and Shashanka Bhide, senior advisor at the National Council of Applied Economic Research as external members of the MPC.

The three posts had remained vacant after Pami Dua, Chetan Ghate, and Ravindra Dholakia demitted office on September 22. They had technically left their positions after the August monetary policy meet, but the government delayed naming their successors. As a result, the monetary policy announcement scheduled for October 1 had to be deferred, and now it will take place on October 9.

The late induction of the external members, though, would not materially change the policy outcome. The central bank is expected to keep interest rates on hold, and would rather wait for policy transmissions to happen in both the longer end of bond yields and bank lending rates.

In a Business Standard poll, all the 10 participants, comprising economists and bank treasurers, expected the RBI to pause. Most observers say the reason for more rate cuts, at least in this calendar year, has ended for the RBI. The MPC can take a view only after seeing the budget math and the fiscal deficit numbers. Any rate cuts now will also not add much of a value, considering the transmission of the past cuts has not happened.

Rather, the central bank will assure all of more accommodation, sound dovish, and continue to provide liquidity support for bond yields to soften to enable the government borrow cheaply.

The new MPC members would also want to continue with the status quo, as they may not have enough original research ready, given that they have been asked to attend the policy meetings in a day’s time. 

In the first few meetings of the MPC in 2016, all the members used to come to a unanimous decision; the same pattern could be seen with the new MPC too, say economists.

The RBI has three ex-officio members in the committee, including the RBI governor, while there are three external members. If there is a tie on the voting, the governor can cast an extra deciding vote. So, in all likelihood, it is the RBI as an organisation and the governor who matter the most for the policy matters. And for the RBI, the monetary policy department does the groundwork on policy research.

The RBI in the past has said if data enables further policy support, it will cut rates. With inflation running at above 6 per cent for a few months now, that space has definitely remained constraint as of now.