Modi govt appoints three outside experts to the Monetary Policy Committee
Clearing the decks for the next monetary policy review by the Monetary Policy Committee (MPC), the government on 22 September announced the names of three outside experts as members.
The experts are Chetan Ghate, professor at Indian Statistical Institute; Pami Dua, director at Delhi School of Economics; and Ravindra Dholakia, professor at Indian Institute of Management, Ahmedabad.
The appointments have been made for a period of four years.
The other members of the committee will include RBI governor Urjit Patel, deputy governor R Gandhi, and executive director Michael Patra.
The MPC is likely to formulate its first monetary policy review on 4 October.
The new MPC will be a six-member panel that will bring transparency to the process of interest-rate setting exercise by the Reserve Bank of India (RBI).
The MPC will meet four times a year to decide on the interest rates in the country by a majority vote. The RBI governor, who so far, used to have the final say in deciding the interest rates in the country, will only have a casting vote in case of a tie in the six-member committee.
Earlier this year, the NDA government had amended the RBI Act to incorporate the setting up of an MPC for taking a call on the monetary policy in the country.
The mandate of the MPC requires the body to strive to contain consumer-price index or retail inflation within a band of 4%, plus or minus 2 percentage points.
A committee headed by the current RBI governor Urjit Patel first proposed the idea of a Monetary Policy Committee in 2014 when he was deputy governor under Raghuram Rajan.
The latest entrants
Ghate was part of a five-member technical advisory committee that provided non-binding advice on interest rates to the RBI governor ahead of each policy review.
He was also a member of the Urjit Patel headed panel in 2014 that recommended the changes to monetary policy, including targeting inflation and establishing a panel to decide rates.
Dua, who is the Director at Delhi School of Economics, has also been a senior Research Scholar at Economic Cycle Research Institute, New York, US. She is an expert of business cycles in India and has written a paper on the subject.
Dr Ravindra H Dholakia
Dholakia was the member of the Sixth Central Pay Commission of the Government of India (2006-2008); he has also been a member of the Expert Committee on Restructuring of the State Public Sector Units (2004-2008), the Public Debt Management Committee (2005-06), and the State Public Finance Reform Committee (1998-2000) appointed by the government of Gujarat.
Benefits of the MPC
Monetary policy in the country so far has been seen as the personal domain of the RBI governor. Historically, RBI has been at loggerheads with the ministry of finance due to opposite mandates that the two institutions hold for their respective heads.
While the job of a finance minister is to push growth - which requires a low interest rate regime in the country - the mandate of a RBI governor is to control inflation- which often requires him to keep the interest rates high.
Constitutionally, the finance minister cannot force an RBI governor to reduce interest rates until the latter feels the need of it. But the former can put great pressure on him by various methods, including the threat of not renewing his tenure.
The tenures of last two RBI governors - D Subbarao and Raghuram Rajan - have made headlines due to this perennial struggle between the finance minister and the RBI governor.
However, with the setting up of an MPC, this usual face-off between the heads of two institutions in the country is likely to become a thing of the past as the RBI governor would no more be a face of monetary policy in the country.
Edited by Aleesha Matharu