October 4, 2016
The Reserve Bank of India will hold its monetary policy review today, with the newly formed Monetary Policy Committee (MPC) fixing interest rates for the first time. This will be also the first policy of Urjit Patel, who assumed charge of the RBI last month from Raghuram Rajan.
Market players will be keenly observing Dr Patel's views as he has made no public appearances since becoming governor on September 4. They will also closely scrutinize how the panel members vote, trying to spot the doves and hawks among the six panel members.
Economists are divided whether there will be a cut in the RBI's key policy rate, which has been kept unchanged since April. About 60 per cent of the 44 analysts polled by Reuters are expecting the RBI to hold rates and the rest expecting a cut of at least 25 basis points.
In a departure from the past when decisions had been taken solely by the RBI governor, the six-member panel will decide on interest rates. The panel has three representatives from the government and three from the RBI, including the central bank governor. If the six-member panel is split 3-3 over whether to hold or cut, the RBI chief has the casting vote.
The RBI has also decided to change the timing of announcement of monetary policy to 2:30 pm. For long, the central bank has been unveiling the monetary policy at 11 a.m.
Economists who expect the RBI to cut rate say that inflation has fallen back within the RBI's 2-6 per cent target range and may remain subdued due to good monsoon. Also, in the March-June quarter, GDP expansion slowed to 7.1 per cent annually from 7.9 per cent in the previous three-month period.
On the other hand, economists who expect the RBI to stand pat say that the newly-formed Monetary Policy Committee may wait for some more time before wielding the knife on interest rate.
The government nominees on the panel are Chetan Ghate, professor at the Indian Statistical Institute; Pami Dua, director at Delhi School of Economics, and Ravindra H Dholakia, professor at IIM-Ahmedabad, while the RBI nominees are Dr Patel, deputy governor in-charge of monetary policy R Gandhi and executive director Michael Patra.
Though the committee has been given a mandate of "maintaining price stability", it must do so "while keeping in mind the objective of growth", according to the amended RBI Act.
The government had in August notified an inflation target of 4 per cent with a range of plus/minus 2 per cent for the next five years under the monetary policy framework agreement with the RBI.