- On October 1, the Reserve Bank of India’s Monetary Policy Committee (MPC) was supposed to announce the country’s key interest rates and the monetary policy for the next two months.
- This will have to wait as the government is yet to appoint three new members at a time when the pandemic is raging, GDP growth is floundering and borrowers are bracing for a mega loan restructuring process.
Why did the RBI postpone the MPC meeting?
The bi-monthly meeting was scheduled for September 29 to October 1.
- The RBI postponed it as it failed to nominate its three members to the six-member panel.
- The tenure of the three members appointed by the government in 2016 expired after the previous policy on August 6.
- MPC is the statutory committee that fixes the key policy interest rate and monetary policy stance of the country as well as the inflation target.
How are MPC members selected?
- RBI Governor Shaktikanta Das is the head of the MPC, while the Deputy Governor in charge of the Monetary Policy Department (Michael Patra) and the Executive Director looking after the monetary policy are members from the RBI side.
- The three government nominees are selected by a committee formed by the government for a four-year term.
- As per the RBI Act, the quorum for an MPC meeting is four, and in effect the committee cannot meet until at least one external member is present, in addition to the three RBI representatives. If there’s a tie on any proposal, the RBI Governor holds the casting vote.
What did the MPC do in the last four years?
The bi-monthly MPC meeting discusses the domestic and international scenario before finalising the repo and reverse repo rates.
If there is no consensus on the rate or policy, there will be voting process.
MPC members differed on a couple of occasions on the quantum of repo rate changes but eventually went by the majority decision.
What does the delay in announcing the new monetary policy mean?
Interest rates play a crucial role in the economy. Any delay in changing the rates will impact the economy as MPC sets the repo rate (the rate at which RBI lends funds to banks) and reverse repo rate (the rate at which the RBI borrows funds from banks).
The pandemic is still evolving and credit offtake has been sluggish
Why was MPC created?
- Prior to October 2016, the RBI Governor used to decide on policy rate.
- Even though he was assisted by a team of officials from the central bank, the ultimate decision rested with the Governor.
- India joined a growing band of countries that, beginning in 1990, adopted flexible inflation targeting as their framework for monetary policy.
- In 2016, the government had provided statutory backing to the MPC by notifying amendments to the RBI Act, 1934.
- The inflation target and tolerance band around it, and accountability with respect to failure to achieve the target, were notified by the government during May-August 2016.
- It was for the first time that an explicit inflation target was given to the RBI, along with failure level.
- Rate-setting decisions were now made through voting in the MPC rather than the Governor alone taking a call on these matters.
- The RBI now releases both MPC resolutions and minutes of the minutes (with a lag) — providing a detailed review of the analysis and individual assessment of the members that went into framing of the policy.