The decision is seen as a fallout of the government’s inability to name three external members who will replace Indian Statistical Institute professor Chetan Ghate, Delhi School of Economics former director Pami Dua, and Indian Institute of Management-Ahmedabad former professor Ravindra H Dholakia, who completed their four-year term as MPC members in August this year.
While the central bank advanced an earlier MPC meet scheduled for April 2020 because of the pandemic, it has never postponed the meeting in the past. Bankers say that the delay will not have any major impact in banking as most forecasters expect that the MPC policy would maintain a status quo on the repo rate. However, given the surplus liquidity in the banking system, many lenders are expected to cut rates to boost lending during the festival season, with SBI already taking the lead.
In its Monday edition, TOI had reported that, if the external members are not appointed, the MPC meeting may be deferred.
The government had adopted a 4% inflation target under the monetary policy framework in 2016. The finance ministry had notified the target for the RBI until March 31, 2021 with an upper tolerance level of 6% and a lower tolerance limit of 2%. In February, before the pandemic, RBI governor Shaktikanta Das had said that the central bank has commenced an internal review of the working of the framework.
While the MPC framework has worked well most of the four years, the pandemic has thrown fresh challenges. First, data collection took a big hit during the lockdown period. Second, while the MPC has been tasked with keeping inflation at 4%, the lockdown created supply disruption which pushed up prices despite a complete collapse of demand. This, economists say, calls for an increase in tolerance for inflation. Third, there is still no clarity on how the government is going to fund the oversized fiscal deficit for the current fiscal, which has thrown up liquidity management challenges.
In terms of the monetary policy framework notified by the government, if the average inflation is more than the upper tolerance level of 4% + 2%, that is, 6%, or less than the lower tolerance level of 4% – 2%, that is 2%, for any three consecutive quarters, it would mean a failure to achieve the inflation target. Where the central bank fails to meet the inflation target, in terms of the provisions of the RBI Act, it shall set out a report to the government stating the reasons for failure.
Meanwhile, the RBI extended a facility for banks that allowed them to borrow from the central bank, an additional 1% of their deposits against the bank’s government bond holding. This facility, introduced during the lockdown, was to end on September 30, 2020, and has now been extended to March 2021.
TIMES VIEW: The lack of clarity on the members of the Monetary Policy Committee is surprising given that the panel has the legal mandate to decide on interest rates, which has become even more crucial in the current economic situation. There has been a series of flip-flops on financial sector appointments and this appears to be the latest instance. It is high time that the government ensures that such crucial appointments are made in time to ensure that investors and markets get the right signals.