RBI’s new monetary policy panel gives money markets the jitters
RBI’s first steps towards adopting a panel route for monetary policy-making seems to have spooked the money markets. More than the new mechanism, it is the conservative nature of the members that has market players worried.
By TNN |
MUMBAI: RBI’s first steps towards adopting a panel route for monetary policy-making seems to have spooked the money markets. More than the new mechanism, it is the conservative nature of the members that has market players worried.
On Friday, the day after the London terror attacks, Indian financial markets recovered along with most global markets. However, money markets displayed nervousness with prices of G-secs falling on heavy sales. Market sources say that the source of the nervousness was a statement by the central bank naming members to its newly-formed monetary policy panel. The terms of reference of the panel are to review macroeconomic and monetary developments, and to advise on the stance of monetary policy.
Adding to the markets’ skittishness is the fact that RBI’s first-ever quarterly review of the monetary policy will be on July 26.
Some participants feel that RBI may go for a repo rate hike to indicate a reversal of the present easy stance. “We think that RBI may normalise interest rates by 100 basis points in the next 9 to 12 months and hence it is advisable to go about it in small, frequent increments,” said ICICI Securities in its debt market report.
In addition to the governor, who will chair the panel, the RBI named four external members — professor DM Nachane, Indira Gandhi Institute for Development & Research (IGIDR), SS Tarapore, former RBI deputy governor, RH Patil, chairman, Clearing Corporation of India (CCIL) and Shankar Acharya, honorary professor, Indian Council for Research on International Economic Relations (ICRIER).
Mr Tarapore was named a ‘primordial monetary hawk’ during his days as deputy governor in the RBI in the 90s. The fear of a return to hawkishness may seem far-fetched in the changed economic circumstances, with inflation remaining moderate and the economy becoming more globalised. However, sentiment continues to play a big role in the market.
Another member, RH Patil, was in the news for his report which recommended disintermediating brokers by conducting trade through an electronic negotiated dealing system. Mr Nachane too has a reputation of being a conservative monetarist.
In the US and other developed markets, interest-rate decisions are taken by central bank panels. Here too, money market players are often wary of inflation hawks. However, research by three economists has suggested that panels perform better than the average of the individuals who compose them. Panels perform better than all but their best member and, given that it might be difficult to know beforehand who is the best person, committees were superior in decision-making.
On Friday, the day after the London terror attacks, Indian financial markets recovered along with most global markets. However, money markets displayed nervousness with prices of G-secs falling on heavy sales. Market sources say that the source of the nervousness was a statement by the central bank naming members to its newly-formed monetary policy panel. The terms of reference of the panel are to review macroeconomic and monetary developments, and to advise on the stance of monetary policy.
Adding to the markets’ skittishness is the fact that RBI’s first-ever quarterly review of the monetary policy will be on July 26.
Some participants feel that RBI may go for a repo rate hike to indicate a reversal of the present easy stance. “We think that RBI may normalise interest rates by 100 basis points in the next 9 to 12 months and hence it is advisable to go about it in small, frequent increments,” said ICICI Securities in its debt market report.
In addition to the governor, who will chair the panel, the RBI named four external members — professor DM Nachane, Indira Gandhi Institute for Development & Research (IGIDR), SS Tarapore, former RBI deputy governor, RH Patil, chairman, Clearing Corporation of India (CCIL) and Shankar Acharya, honorary professor, Indian Council for Research on International Economic Relations (ICRIER).
Mr Tarapore was named a ‘primordial monetary hawk’ during his days as deputy governor in the RBI in the 90s. The fear of a return to hawkishness may seem far-fetched in the changed economic circumstances, with inflation remaining moderate and the economy becoming more globalised. However, sentiment continues to play a big role in the market.
ADVERTISEMENT
Another member, RH Patil, was in the news for his report which recommended disintermediating brokers by conducting trade through an electronic negotiated dealing system. Mr Nachane too has a reputation of being a conservative monetarist.
In the US and other developed markets, interest-rate decisions are taken by central bank panels. Here too, money market players are often wary of inflation hawks. However, research by three economists has suggested that panels perform better than the average of the individuals who compose them. Panels perform better than all but their best member and, given that it might be difficult to know beforehand who is the best person, committees were superior in decision-making.
Download
The Economic Times Business News App for the Latest News in Business, Sensex, Stock Market Updates & More.
The Economic Times Business News App for the Latest News in Business, Sensex, Stock Market Updates & More.
Download
The Economic Times News App for Quarterly Results, Latest News in ITR, Business, Share Market, Live Sensex News & More.
The Economic Times News App for Quarterly Results, Latest News in ITR, Business, Share Market, Live Sensex News & More.
ADVERTISEMENT
