 "MPC really doesn't really curb RBI decision on rates")
Less than a fortnight left for the next monetary policy, and the government is yet to form a monetary policy committee (MPC), leaving analysts wondering why.
While the government did not commit to a timeframe, it was widely expected that Urjit Patel's first monetary policy will be lead by the six-member MPC, where the RBI governor and two other members from the central bank will represent the RBI and three others would be outside experts. All the members will have one vote each, but in case of a draw, the RBI governor will have a casting vote.
From the outset, then, it is evident that the RBI will prevail in the MPC as three RBI members would unlikely have different views on setting rates. Even if the other experts differ with the central bank, the RBI governor can use his casting vote and settle the matter in RBI's favour.
Even as the MPC will be targeting inflation, experts say RBI's decision is centred on one more critical parameter - that of real interest rate, which the difference between the policy rate and the prevailing inflation.
The inflation targeting for the Indian context itself is the brainchild of Patel, who, as deputy governor in 2014 headed the committee to review the monetary policy framework. Even as the central bank and the MPC would want to contain inflation at around 4%, RBI's policy action in the recent past has been guided by real interest rate.
RBI has hinted in the past that the real interest rate conducive for the economy and beneficial for the savers would be around 1.5-2%.
In August, the CPI inflation was at 5.05%. Therefore, the real interest rate works out to around 1.5%, which is in line with what RBI wants to keep. If RBI has to cut rates further, the real interest rate will fall and this is something that the RBI may not want to have.
Only when inflation eases further, there could be a scope for RBI or MPC to ease rates.
According to economists, if the RBI has a pre-determined real interest rate in mind, it would be very difficult for the external members to persuade the central bank to cut rates even as the target could be inflation.
"In this context, the MPC members would be powerless in front of RBI. Now, if the government publicises the decisions of the members, as previously announced, it would be embarrassing to see that the RBI de facto treated the external members much like those of technical advisory committee," said an economist who requested anonymity.
Therefore, getting suitable candidates for the MPC itself could be difficult for the government. Besides, the government has to appoint a new deputy governor too after Patel became the governor.
However, the real interest rate range may not be sacrosanct for the RBI, said Upasna Bharadwaj, economist at Kotak Mahindra Bank.
"It is a little more fluid than an absolute target for RBI. The ultimate target is containing the CPI inflation, in which 50% weight is that of food - a responsibility of the government," Bhardwaj said.
Both Bharadwaj and Soumya Kanti Ghosh, chief economist at State Bank of India say they don't see any conflict between the RBI's way of thinking and the MPC approach.
"In any country where there is inflation targeting, MPC is the standard approach. There is no conflict here," said Ghosh.
But in those countries where a committee approach is followed, generally there are seven members with no chance of having a tie in vote, which is not the case with India.
