MPC only after new RBI governor takes charge

An announcement of Raghuram Rajan's successor is expected before the end of this month

The appointment of three members to the monetary policy committee (MPC) is going to take place after the new governor of the Reserve Bank of India (RBI) is appointed. Informed sources in the government said the Cabinet secretary will wait for the Prime Minister’s Office and the finance ministry to decide who will take over from Raghuram Rajan.

An announcement of Rajan’s successor at RBI is expected before the end of this month. “It makes sense to give the new governor a chance to confer with New Delhi as to who will fill up the places in the committee,” said one of the sources, on condition of anonymity. Rajan will complete his term at RBI on September 7.

The RBI Act has been amended this year to provide for the setting up of an MPC to decide along with the RBI governor on which way the interest rates should move. For both the equity and the bond markets, it is important to know who the members of the committee are. In his last setting of the rates as governor on August 9, Rajan had said he hoped the committee would be in place before his term ends. But this now seems unlikely as the government wants to have the confidence of his successor regarding the members who are to populate the committee. “Since the committee will essay a vital role, it is best that they are to begin with, on the same page as the governor,” said the source. The delay again indicates the gradual parting of ways between the present governor and sections within the government, who clearly want to begin with a fresh plate.

One of the sources said no panel of names has been forwarded from the finance ministry to the Cabinet secretariat.

The ministry has confined itself with details of how the MPC will go about its job instead of zeroing in on names. “We have not reached out to anyone to become a member of the committee as it would seem out of place at this juncture.”

Earlier this month, the government had “fixed” a four per cent inflation target for the next five years for RBI to maintain, with a tolerance range of two per cent on either side. The period stretches from the date of publication of the gazette notification, August 5, 2016 to, end on March 31, 2021. While the direction has been set, the terms and conditions of the committee acknowledges there will be short-term deviations. The composition of the committee will consequently give an indication to the markets which way they might vote when there are no clear directions for the rates to vary.

RBI has already appointed its three members to the panel which includes the governor, Deputy Governor Urjit Patel and Executive Director Michael Patra. The government, in turn, is supposed to name the three other members to the committee on the recommendations of a search-cum-selection committee headed by the Cabinet secretary. A release issued by the finance ministry notes “These three Members of MPC will be experts in the field of economics or banking or finance or monetary policy. They will be appointed for a period of 4 years and shall not be eligible for re-appointment”.

The process to set up the MPC had begun when Finance Minister Arun Jaitley amended the RBI Act as part of the Finance Bill in 2016. After Parliament cleared the amendments, the notification regarding the constitution of the committee was made formally effective on June 17, 2016. Once the law was in place, the rules governing the procedure for selection of members and terms and conditions of their appointment and factors constituting failure to meet the inflation target under the MPC framework have also been notified.