New-look RBI's MPC set to take rate call amid cuts by global banks

RBI's MPC has six members - three are from within RBI: Governor, deputy governor in charge of monetary policy, and one more officer from RBI who is nominated by the central board of RBI

The Monetary Policy Committee (MPC) of the Reserve Bank of India (RBI) meets every two months, but the October meeting holds significance for a variety of reasons -- not only because it takes place against the backdrop of leading global central banks cutting rates, but also because the panel will have three new faces.

The MPC has six members, of whom three are from within the central bank: The governor, deputy governor in charge of monetary policy, and an officer nominated by the central board of the regulator.

The three external members are appointed by the central government.

The new external members will be selected by a six-member search-cum-selection committee headed by Cabinet Secretary T V Somanathan. Of the remaining five members, two are the RBI governor and Union economic affairs secretary. The other three are independent experts from the field of economics, banking or finance, or monetary policy.

Sources said the panel was likely to select the MPC external members in the last week of September. The October monetary policy is scheduled for October 7-9. The appointment of the external members was delayed in 2000, which led the central bank to reschedule the policy review meeting. The meeting of the search committee was held online because that was pandemic time.

This time it is expected to be a physical meeting.

RBI Deputy Governor Michael Patra has been a member of the MPC since its inception in October 2016. Patra was member secretary of the Urjit Patel Committee, which proposed the formation of the MPC.

The market will be closely watching the new members. Will the new MPC be younger? Will there be unanimity or discord? These are issues that will be keenly watched.

Jayanth Varma and Ashima Goyal, two members of the previous MPC, differed with the majority view in a few meetings. Both made a pitch for a change in the policy stance and cut in the policy repo rate.

The panel paused after raising the policy repo rate by 250 basis points between May 2022 and February 2023. The policy stance “withdrawal of accommodation” was also kept unchanged.

Varma and Goyal wanted the policy stance to be changed to “neutral” and a repo rate cut of 25 basis points.

It will be interesting to see the new members' views on both the rate and stance, particularly when there is action on this by leading central banks. The European Central Bank (ECB) did its second rate cut of the year, followed by a 50-basis point cut by the United States (US) Federal Reserve.

The Bank of England and Bank of Japan maintained the status quo.

RBI Governor Shaktikanta Das has resisted change in both the interest rate and stance, citing volatile food prices and slow progress of last-mile disinflation. He emphasised hitting the 4 per cent inflation target.

The headline inflation rate for two consecutive months – July and August -- was below 4 per cent, the central bank’s target. This happened for the first time after 2019.

The food inflation rate was 5.1 per cent, with the negative momentum being more than offset by an unfavourable base.

Headline inflation is again expected to be closer to 5 per cent in September mainly due to an unfavourable base.

In recent interactions, Das said the decision to rate cut will depend upon the inflation momentum. RBI has projected Q2 inflation at 4.4 per cent – there is a possibility it could be revised downward. For Q3 RBI’s projection is 4.7 per cent, and for FY24, it is 4.5 per cent.

In this context, the communication from the central bank for justifying its action will be closely watched. The majority of the market believes the rate action will start from December though views differ whether rate cut and stance change take place in the same policy, or rate cut will be followed by stance change.

Amid the rate action by some of the leading central banks and the recent inflation trajectory, the views of new members assume significance. It is to be seen if their views are in sync with the internal members of the monetary policy.

The term of the new MPC will also coincide with review of the monetary policy framework. Already there is a view, mainly put forward by the chief economic advisor V Anantha Nageswaran, that food should be excluded from the inflation targeting framework. In this context the view of the new MPC members on this issue will also be interesting.

Key numbers 
 

- The six-member rate-setting panel paused after raising the policy repo rate by 250 bps between May 2022 and February 2023. The policy stance ‘withdrawal of accommodation’ was also kept unchanged

- <4% Headline inflation for two consecutive months

- 5.3% August food inflation 

- 4% RBI’s inflation target with a tolerance band of +/- 2 percentage points RBI's inflation projection

- 4.4% Q2

- 4.7% Q3

- 4.5% FY24