The best thing about the new MPC ( or monetary policy committee) members is that they have been appointed. A central bank unable to announce its monetary policy as scheduled, because half the members hadn’t been appointed, is a lapse that invites sarcasm.
That said, the quality of the new external members probably makes it worth the wait. Jayanth Varma is by far one of India’s most experienced academic when it comes to suggesting policy solutions for the financial sector. This professor of finance from IIM, Ahmedabad has been a fulltime member of the SEBI ( Securities Exchange Board of India) and designed the framework of the new futures and options format which would replace the badla system of carry forward trading. He has been on the boards of large banks and was a member of the Raghuram Rajan Committee on financial sector reforms.
He certainly brings to the table an extraordinarily sound knowledge of the financial sector. As the learned professor himself told CNBCTV18, “monetary transmission is a financial phenomenon than economic phenomenon” and there is a need to assess if “financial friction has a role in interest rates transmission”. Considering that the RBI has been repeatedly foxed by the many hurdles in transmitting rate signals, Professor Varma can suggest whether “finance ideas can help in the current environment “, as he put it.
The other MPC member who can bring a fresh perspective is Shashanka Bhide, an agriculture economist from NCAER. Food inflation is likely to be the talking point in the upcoming and next few MPC meetings. Besides, even if agriculture is shrinking in terms of its contribution to GDP, it remains the biggest employer and its linkages with the rest of the economy were recently reinforced when the migrants marched back to their villages. The only way to stimulate demand was MNREGS and here again Dr Bhide’s insights will be useful.
Ashima Goyal’s is the most expected announcement. As an economist specializing in macroeconomics and monetary policy, a former member of monetary policy advisory committees, and a former member of the PM’s Economic Advisory Council, she has considerable experience in policy making. She has most appropriately resigned from the PMEAC. Her continuation would have raised questions about conflict of interest since successive governments have been known to try and influence the monetary policy.
Some experts may look askance at the composition of new MPC on the ground that an MPC with an inflation targeting mandate should have a largely monetary policy and macroeconomics expertise. The counter to that is monetary policy impacts the entire economy and hence setting of interest rates and monetary policy should take into consideration all aspects of the economy, which this MPC is designed to do.
Also, it isn’t certain whether the inflation targeting framework will continue exactly in its current form. The monetary policy agreement which mandates that the MPC keep CPI at 4 percent, +/-2 percent, comes up for review in March 2021. Even as an internal RBI committee is reviewing the working of the inflation targeting framework, some experts are already suggesting a return to the multi indicator approach that was in vogue earlier. Should inflation targeting in its current form be continued is a debate for another day.
For the moment, the brand new MPC is faced with an economy that is beset with problems in every sphere from declining savings, falling rural wages, a shrinking formal sector job market, stagnant capex, beleaguered banks and NBFCs, a yawning fiscal gap, and a slowing economy. A multifaceted MPC is exactly what the doctor ordered. Good luck to the new committee as it hits the ground running within 24 hours of being appointed,