India’s first rate-setting panel bows out with a mixed record

By Anirban Nag

The Reserve Bank of India’s first Monetary Policy Committee completes its four-year term with a mixed record.

While the six-member panel managed to keep inflation within the 2% to 6% target band for most of that time, it ends the period with consumer-price growth well above that range.


The MPC held its last policy meeting under its current term on Aug. 4-6, and the minutes published Thursday may offer insights into the outlook for prices amid economic disruptions caused by the coronavirus pandemic. The committee will now be overhauled with three new external members expected to join by October and possibly changes to its targeting framework being introduced sometime next year.

If inflation exceeds the upper limit of the target band for three consecutive quarters, the RBI Act requires Governor Shaktikanta Das to write a letter to the government to explain why the MPC failed to meet its goal. Average inflation in each of the first two quarters has already exceeded 6% and will likely remain elevated after consumer prices grew 6.93% in July, driven by higher food prices.

Price Stability
The MPC held its first meeting in October 2016 under then-Governor Urjit Patel. Out of 24 policy decisions since then, 13 have been to keep rates steady, including August’s vote to stand pat. The committee has cut the benchmark rate nine times during its four-year term and only increased it on two occasions.

While a recent study says the MPC has surprised the markets for nearly half of its term, economists agree broadly that it’s helped to anchor price expectations in a country previously plagued by double-digit inflation.

“The outgoing MPC worked successfully in an environment of domestic challenges, from demonetization to addressing an economic slowdown, while keeping price stability at the center of its deliberation,” said Rahul Bajoria, senior India economist at Barclays Plc in Mumbai. “While recent data has turned adverse, by and large, the inflation targeting framework has been strengthened considerably in the new regime.”

At the MPC’s first meeting under Patel, the benchmark repurchase rate was at 6.5% and inflation stood at 4.4%. The policy rate is now 4%, with the bulk of the easing coming under Das, who succeeded Patel in December 2018. Under Das, the MPC has also abandoned its “calibrated tightening” policy stance for an easing bias.

The three external members who will exit the MPC are Ravindra Dholakia, considered to be dovish on policy, Chetan Ghate, who tended to be hawkish, and Pami Dua, who struck a middle-path at most meetings and voted with the majority.