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Metamorphosis – old lady of mint street in new garb

India has now moved into a new phase of Monetary Policy formulation. A legislative mandate on policy setting by the Reserve Bank of India, guided by a Monetary Policy Committee (MPC), has set  a CPI target of 4 per cent.  This is expected to “maintain price stability while keeping in mind the objective of growth.”

This marks the end of an era for India’s most prestigious institution, RBI, more aptly, ‘the Rajan Era.’ This has earned universal praise for the way our central bank under successive Governors guided monetary policy amid global uncertainties, ensuring growth and financial stability. The stewardship of Dr Raghuram Rajan (2013-16) with success in taming inflation has won international acclaim.

Given a virtually dual mandate, price stability and growth, somewhat like the US Federal Reserve’s twin objective of price stability and full employment, RBI hereafter gets the lead for policy guidance and rate-setting from a six-member Monetary Policy Committee. The committee will have three economists nominated by the government and three by RBI including the new Governor,  Dr Urjit Patel, as  Chairman.

The MPC mandate is for five years, in the first instance, during which CPI should be contained at four per cent with two per cent plus or minus.  MPC launched itself with a bang – an unexpected repo rate cut from 6.5 to 6.25 per cent, of surprise to economists and market analysts, at its first meeting on 3-4 October. The vote for rate cut was unanimous .

Unlike statements on bi-monthly policy reviews by the Governor himself, the MPC assessment and policy guidance were set out in a RBI release, giving the full text of MPC resolution. Later policy communication was done orally by Governor Patel in a brief media interaction.   What is more, indications were  given of further easing – repo rate moving down by at least another quarter per cent in December.

Prime Minister Modi should be delighted that his choice of Dr Urjit Patel as Governor of RBI, to succeed the intellectually provocative Dr Raghuram Rajan, has paid off, with the assurance of rate reductions in coming months, no matter global headwinds.  The Finance Ministry has hailed the cut as one to trigger an economic upswing closer to 8 per cent growth in the current fiscal 2017 itself.

Government and RBI are now virtually on the same page on monetary policy management. Governor Patel himself voted in favour of the latest cut based on an overall assessment of both inflation prospects and growth outlook, as embodied in the RBI’s Monetary Policy Report (October 2016).

Governor Patel, in effect, will be communicating on MPC resolutions and give his own assessments on   emerging global and domestic developments at the press briefings. He pointed out, with the two per cent margin around the targeted 4 per cent CPI, the mandate is to maintain retail inflation between 2 per cent and 6 per cent.

How the MPC deliberations evolve over time in the midst of global uncertainties, trade slowdown, possible spillovers from China’s rebalancing efforts and, along with perhaps some differing perceptions of Governor Patel, remains to be seen.


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