In Charts: The Life And Times Of India’s First Monetary Policy Committee
How did India’s first monetary policy committee vote and did it deliver on its mandate?
India’s first Monetary Policy Committee will certainly find a special place in the country’s economic history.
After decades of monetary policy driven from the office of the Reserve Bank of India’s governor, decisions on whether interest rates should be cut, hiked or held were transferred to a six-member committee starting October 2016.
The idea was that six heads are better than one and a committee would be less susceptible to potential pulls and pressures from New Delhi. The MPC was handed a legal mandate of maintaining retail inflation at 4%, within a tolerance band of +/-2%.
The notification appointing committee members for a four-year period came on Sept. 29, 2016. Unless it gets an extension, the current committee completes its four-year cycle with the August meet.
Over these four years, the committee has seen it all. Hikes and cuts, unanimous calls and divided views, abrupt departures and emergency meets.
Hold It!
Economic conditions over the course of these four years are probably best characterised as volatile. The committee saw the economy go through demonetisation, the implementation of the goods and services tax, a brief period of high oil prices and now the Covid-19 crisis.
The committee voted most frequently to ‘hold’ interest rates, followed by votes to cut rates. It voted to hike rates on only two occasions. That’s because inflation, for the most part, remained within the MPC’s tolerance band.
The high on the policy repo rate was 6.5%, which is where rates were when the committee first sat. The repo rate fell to 6%, only to rise back to 6.5% and then fall to a historic low of 4% amid the ongoing Covid-19 crisis.
I Beg To Differ
The early meetings of the MPC were consensus-driven. The first four meetings threw up unanimous decisions. It was at the fifth meeting that external member Ravindra Dholakia dissented and called for a 50-basis-point rate cut, while other members voted for a hold.
Despite the early trend of consensus calls, over its tenure, the MPC took more split decisions than unanimous calls. The tally: 14-9 in favour of split decisions.
The minutes of the MPC meets became more detailed with each successive sitting. Even when members agreed, their arguments and rationales often differed.
Hawk, Dove Or Somewhere In Between
Each member left us with an impression of what they stood for. That impression came through in their remarks more than in the voting. Still, voting patterns differed.
Four members were part of the committee for the entire four-year period — Chetan Ghate, Pami Dua, Ravindra Dholakia and Michael Patra.
Dholakia came off as the dovish, with only one single vote for a rate hike. Patra voted four times for a hike. Ghate voted most frequently for a ‘hold’, while Dua most often went with the consensus view.
This MPC was headed by two governors — Urjit Patel and Shaktikanta Das. While the two saw differing economic conditions during their time, Patel mostly voted (10 times) for a hold on rates. In contrast, Das voted seven times for a cut and the remaining two times for a hold.
25 Is So Passé
The committee threw a few surprises along the way. Both in terms of delivering decisions the market was not expecting but also mixing up the quantum of rate changes.
While there is no strong economic logic in favour of moves in multiples of 25 basis points, that is what many central banks have stuck to for decades. That is what markets have come to expect as well. The first suggestion of an off-sized 40-basis-point cut came from Dholakia in the October 2017 meet. But it was only much later, after Das took over as governor, that the committee voted for a move in a quantum other than 25 basis points.
Over its tenure, the committee has voted once for a 35-basis-point cut, once for a 40-basis-point cut and once for a 75-basis-point cut.
Let’s Take A Stance!
The committee started out voting on just the repo rate—India’s policy rate. Along the way, however, the committee felt the need to use the monetary policy stance to communicate its view. And so, starting the October 2018 meet, the MPC also voted on the stance.
It voted seven times to hold an ‘accommodative’ stance, twice for a ‘neutral’ stance and twice for a ‘calibrated tightening’ stance.
As the current MPC’s term ends, there is a debate as to whether the reverse repo rate should be added to the committee’s platter.
Amid the Covid-19 crisis, the RBI has chosen to tweak the reverse repo rate independently, which some see as a move that diminishes the role of the MPC and existing monetary policy framework. Should the committee then vote on the reverse repo rate as well? The debate is underway.
Finally, Did We Do Ok?
Finally, what matters is the committee’s track record in delivering on its inflation mandate.
On that, this committee had a good run. For the most part, inflation remained within the tolerance band. It fell below the lower end of the comfort band in two monthly readings. It has risen above 6% for six monthly readings.
The final judgement on the track record, however, depends on the interpretation on the mandate. For those, who interpret the mandate to say that inflation should settle close to the mid-point of 4%, the committee has not had complete success given that inflation remained volatile during the last four years.
The committee, however, gets high marks in ensuring that inflation remained within the tolerance band for most of its tenure, helped by the prevailing global and local macroeconomic conditions.
This story has been updated after the August 6 MPC meet.