Joydeep Sen
Before the formation of the Monetary Policy Committee (MPC), the RBI policy rate formulation used to be a one-man decision, that of the Governor. There was a Technical Advisory Committee (TAC) meeting held before the Policy Review meeting, but the advice of the TAC was not binding on the Governor. Globally, most central banks take decision through the committee process. In a study conducted by Mahadeva and Sterne in 2001 found that of the 94 central banks in their sample, 79 take decisions in a committee.
In India, the initiation of the committee process was expected to make policy rate decisions more scientific, more debated and bias-free. The conceptualization of the committee process was done by the Government during the tenure of Dr Raghuram Rajan. He supported the committee process, stating the benefits: (a) multiple heads are better than one (b) it takes the pressure off one individual and (c) scope for mistakes is that much lower. The implementation of the MPC happened immediately after the tenure of Dr Rajan; the Policy Review meeting held on 4 Oct 2016 was the first ‘committee’ meeting. It is a 6-person committee, comprising 3 persons from the RBI (including the Governor) and 3 external economists nominated by the Government.
However, the way the committee has functioned so far has not been upto expectations of market participants. There have been three committee meetings so far, and in all the three meetings, voting has been 6-0 in favour of the decision taken. While there is nothing wrong in unanimity, the point of debate is that we are not in a phase of secular uptrend or secular downtrend of interest rates. Complete unanimity implies a lack of healthy difference of opinion, expected during a juncture of change from ‘accommodative’ to ‘neutral’ policy stance, that too in a situation of after-effect of demonetization and inflation being broadly within target. The rationale given by the committee members for the decision taken, as published in the Minutes and stated during the post-meeting media interactions, at times does not give a solid argument in favour of the decision.
What, then, is the solution? The committee should be maintained, but the process should be strengthened. To address the confusion in the market about the future outlook of the MPC, we should have a system of projected signal interest rates. The projections would not be binding on the RBI and would be subject to change along with change in economic variables.
To draw a parallel, in the US, the Fed FOMC issues a policy statement following each regular meeting that summarizes the Committee's economic outlook and the policy decision at that meeting. The US Fed schedules eight meetings per year. In four of these meetings, participants submit individual economic projections in conjunction with four FOMC meetings. A compilation and summary of these projections (without attribution) is circulated to participants, and a detailed summary of the economic projections (the Summary of Economic Projections, or "SEP") is included as an addendum to the minutes that are released three weeks after the meeting. The SEP is popularly known as the ‘dot plot’ because the projections are shown as dots in a graph.
The US Fed gives projections on GDP growth, unemployment and inflations. We also have a similar system: the RBI shows a ‘fan chart’ on projections of GDP and inflation. What we do not have is projections on interest rates, in lines of the SEP or ‘dot plot’. What we need to have is the projection of interest rates, namely the signal repo rate of the RBI, of the six committee members. The publication of the projections may be without attribution to the individual members, as it would make them more comfortable.
The benefit of this move will be that currently, market participants glean through the projections on GDP and inflation, and statements of the individual committee members on the rationale of the decision taken, to gauge the rate outlook. However, there are communication gaps on the future outlook of the committee - what they have in mind and the way it is perceived by the market. The rate projection (dot plot) will make it more objective, doing away with the uncertainties of interpretation of the published language.
The author is an independent financial advisor.
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