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Of Monetary Policy and RBI's Independence...
Tue, 4 Oct Pre-Open

Today's the day. All eyes in the Indian stock markets will be set on the Reserve Bank of India's (RBI) bi-monthly monetary policy review. And why not. There are two firsts to be seen in this monetary policy meet. One is the Monetary Policy Committee (MPC). Second is the stance of newly appointed RBI governor Urjit Patel.

The media and the markets are betting on interest rate cuts. Maybe Dr Patel will change the policies introduced by Rajan. Maybe he won't. No one knows yet. But there is something that we do know. India's monetary policy won't have his stamp on it. This is because the big decisions on interest rates will now be taken by MPC. The committee will have equal representation from the RBI and the government. Dr Patel will have a veto in case of a deadlock. But he won't set the repo rate by himself.

The new MPC is comprised of six members. Three members, including the governor, are from the RBI while other three are nominated by the government.

Is the dilution in the powers of RBI's Governor good or bad? How will it affect interest rates?

There can't be a one-word answer to this. There are merits as well as demerits of having a committee taking monetary policy decisions instead of the RBI Governor being solely in charge.

Historically, there have been differences of opinion between the Government and RBI. When Mr P. Chidambaram was the Finance Minister, he batted for lower interest rates and many times contradicted the RBI's stance on policy rates. Mr Arun Jaitley, his successor, has been following the same approach.

The MPC has 3 members representing the government. So far there is no known uniform pattern seen in the thought process of government's three nominees on monetary policy. However, is a chance that all of them may have the same opinion about the movement of interest rates in the economy. They are likely to bat for the government and suggest a rate cut to aid the economic growth.

On the other hand, all RBI representatives may have reasons to stay put. In such a case, the RBI Governor - Urjit Patel - would hold the key as he has one additional vote to cast in case of a tie. Expectations are that Urjit Patel will rise to the occasion and use his vast experience of handling monetary policy at the RBI to deliver on this front.

The above play is a possibility . The final verdict on interest rate decision will be seen today. One thing, however, however, is a given here. With the MPC in place, there sure would be a dent in the independence of the RBI.

Keeping in mind the history of the government and the RBI, chances of disagreements are high. Predicting how this dynamic will pan out is hard. The media is certainly not capable of it. Markets care about it only once every two months, when the policy date comes near.

But this is a very important. It's a big change in India's monetary policy framework. It will influence the course of our economy. You must have a credible way of understanding the 'new RBI'.

Thankfully, there is a way. Vivek Kaul has explained the challenges that Dr Patel will face in one of his articles, The Biggest Challenge for the New RBI Governor Urjit Patel Is... Do check it out.

To stay on top of macro trends in India, like the one above, we recommend the Vivek Kaul Letter (subscription required). Vivek addresses a range of big issues in this unique newsletter - India's disastrous jobs situation, the government's handling of oil prices, the mess in public sector banks, the current state of India's real estate bubble...and a lot more!

In fact, as you read this, Vivek has just come out with a video that details all...including how these macro trends could impact you. Click here to watch the whole 58-minute video.

For information on how to pick stocks that have the potential to deliver big returns, download our special report now!

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Aug 17, 2017 02:22 PM

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