With the appointment of economists Ashima Goyal, Jayanth R Varma and Shashanka Bhide to the Monetary Policy Committee (MPC), the rate-setting, six-member panel may acquire a slight dovish tilt, given their earlier criticism of hawkish policies that tend to over-emphasise the importance of high inflation, some analysts said on Tuesday.
Nevertheless, they expect the MPC to hold on to the benchmark lending rate when it meets from October 7 to 9. Elevated retail inflation in times of a record GDP contraction and calls for a larger fiscal stimulus have complicated the MPC’s task. It may, therefore, choose to only ensure a greater transmission of the earlier rate cuts this week, they said.
While views on monetary policy may change, depending on the position one holds or the situation the economy is in, any dovish tilt to the MPC may offer some comfort to the government that needs the central bank to continue to share its concerns over growth, especially after the devastation caused by the Covid-19 pandemic.
In a report, economists at Nomura said: “We believe that the new external members are more neutral-to-dovish in their policy views, which will tilt the overall MPC in a dovish direction. However, we do not expect any immediate impact on policy, given the current high levels of inflation.” Nomura expects unchanged policy rates and the continuation of an accommodative stance this week. Thereafter, it forecasts a cumulative 50bp of rate cuts, “as we expect growth to remain below trend and inflationary pressures to subside”.
The new members, says Nomura, are likely to be “vocal on liquidity and credit market dynamics and may not shy away from advocating the RBI’s use of the unconventional measures”. It, however, conceded that unilke Goyal and Varma, views of Bhide are not well known on monetary policy, so “we would place him in the neutral camp for now”.
Retail inflation eased only marginally to 6.69% year-on- year in August, against a revised 6.73% in July, remaining above the MPC’s tolerance band of 4 (+/-2)% for eight out of the previous nine months. Meanwhile, the economy shrank by as much as 23.9%, year on year, in the June quarter.
The MPC’s usual bi-monthly review meeting was earlier scheduled for September 29-October 1 but it had to postpone due to a late selection of the new members after the term of the earlier ones ended last month. External members make up for a half of the six-member MPC, headed by the Reserve Bank of India (RBI) governor, and it must have a quorum of four.
“The members… shall hold office for a period of four years or until further orders, whichever is earlier,” the finance ministry said in a gazette notification.
Goyal is a professor at Indira Gandhi Institute of Development Research; Varma is a professor at Indian Institute of Management (Ahmedabad) and Bhide is a senior advisor at the National Council of Applied Economic Research, Delhi. They replace Chetan Ghate, professor at the Indian Statistical Institute; Pami Dua, director at the Delhi School of Economics; and Ravindra Dholakia, professor at the Indian Institute of Management, Ahmedabad.
The government had set up the MPC in 2016, shifting the interest rate-setting power from the RBI governor to the panel. Its mandate is to keep annual inflation at 4% until March 31, 2021, with an upper tolerance of 6% and a lower band of 2%. The MPC had last met from August 4 to 6, which was its 24th meeting.
The ex-officio members of the MPC are the Reserve Bank of India governor, deputy governor (in-charge of monetary policy) and one more officer from the central bank who is appointed by its board. According to the RBI Act, the external members can hold office for a period of four years and they are not eligible for a re-appointment.