Does RBI’s Monetary Policy Committee have powers to vote on reverse repo rate hike..

An intriguing piece by Aparna Iyer of Mint (HT: Niarajan).

She says MPC minutes of RBI’s April 2017 policy  reveals an interesting paradox. The policy made headlines as central bank raised Reverse Repo rate. However, Minutes show none of the members voted on the reverse repo decision.

Why? Well as per the Government, MPC can vote only on repo rate!:

The minutes of the latest meeting of the monetary policy committee (MPC) have disclosed a lacuna in the legal framework under which the committee operates.

In the minutes, no member has placed on record his or her vote for the 25 basis points hike in the reverse repo rate that the Reserve Bank of India (RBI) announced on 6 April.

The upshot is that we simply do not know whether MPC voted for the move but didn’t place it on record, or did not vote at all. But then, it’s unlikely that the committee voted but didn’t mention it in the minutes because the reverse repo rate hike was the most significant action taken, given that this is the effective policy rate currently due to the surplus liquidity.

Does MPC have the powers to vote on the reverse repo rate? Logically, the reverse repo rate and the repo rate are both policy rates. However, the notification by the government states clearly, “The Monetary Policy Committee would be entrusted with the task of fixing the benchmark policy rate (repo rate) required to contain inflation within the specified target level.” This could mean MPC can vote only on the repo rate and not on the reverse repo rate.

On the other hand, amendments to the Reserve Bank of India Act available on the central bank’s website state that MPC shall determine the policy rate required to achieve the inflation target. This means that the committee can vote on the reverse repo rate as well, because the policy rate is defined as both reverse repo and repo rate in the same Act.

The resolution statement itself of MPC said that the reverse repo rate hike was in consonance with the decision to narrow the rate corridor. It didn’t mention who can take the decision.

All kinds of weird things are happening at Indian central bank.

The Minutes were also confusing as one member (Michael Patra) said we should go for a rate hike given future inflationary pressures. But in the end, decided to vote for no change along with the other members:

To sum up, I believe that a pre-emptive 25 basis points increase in the policy rate now will point us better at the target of 4 per cent to which the Committee has committed explicitly. It will also obviate the need for back-loaded policy action later when inflation is unacceptably high and entrenched. On balance, however, I vote for holding the policy rate unchanged in this bi-monthly meeting and await a few more readings of incoming data so that remaining transitory factors have passed and a clearer assessment of domestic and global macroeconomic conditions emerges.

How does the belief change in the end is a mystery.

Another problem with MPC is that though MPC members vote for the policy. But they don’t face the media. The media questions are answered by the RBI executive which has only three members from MPC. This could be streamlined as well.

Overall, Indian central bank has been a little too late to adopt this process of MPC. It has just been a case of easy copying from the other central banks. This was fine till a while ago as MPC was seen as the thing. Most people have now realised they hardly serve much purpose. Yes, we move from one person policy to a committee driven policy but in the end it just adds to confusion.  The MPC members come from similar educational backgrounds and the thinking is very similar.  Even if thinking is different voting is usually similar. Those who dissent are obviously in minority and can do little to change the course of policy as we have seen in recent FOMC proceeding at the Federal Reserve.

Even the single focus on inflation target is under attack. The pioneer of it all, Reserve Bank of NZ could have dual targets in near future.

Though, the recent Indian experience takes the cake. It looks like a case of haste with multiple actors contributing to multiple legislatures leading to ambiguity on even basic things as powers to set rates.

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