New external members of RBI's MPC likely to keep markets guessing

Oct meeting being held amid a flurry of activities by leading central banks

The three new external members of the Reserve Bank of India (RBI)’s Monetary Policy Committee (MPC) will be taking charge at a time when many believe the interest rate curve is at an inflection point.

On Tuesday, the government notified that Director of Delhi School of Economics Ram Singh, veteran economist Saugata Bhattacharya, and Nagesh Kumar, director and chief executive, Institute for Studies in Industrial Development, will be the three new external members of the MPC.

The three members come from a very diverse field of expertise, and the Committee will have a mix of academic, markets and public policy experience.

Singh, a doctorate in economics from Jawaharlal Nehru University, has done extensive work on law and economics. His area of expertise also includes public economics, taxes and public finance, among others.

Kumar, a doctorate from Delhi School of Economics, has research interests, including Foreign Direct Investments and International Trade, Regional Economic Integration and Industrial Restructuring in Asia, and Industrial policy, among others.

Bhattacharya is an economist with over 30 years of experience in economic and financial markets analysis, policy advocacy, infrastructure and project finance, consumer behaviour and analytics. He was also the chief economist of Axis Bank.

He is the first one to be appointed in the rate-setting panel who has a financial markets background. In the previous two MPCs — 2016-2020 and 2020-2024 — there was no one from the financial markets. Bhattacharya has tracked the monetary policy developments closely over the years, and commented on such issues. In a newspaper article after the August policy review meeting, he suggested that a rate cut may be a risk worth taking, given the likely future growth-inflation tradeoff.

Interestingly, both the earlier MPCs had a member from the Indian Institute of Management (IIM-A), and also a woman member, which is not the case this time.

The views of the other two members — Singh and Kumar — on growth, inflation and monetary policy are not widely known and would keep the market guessing.

“Prof Ram Singh specialises in public economics and finance, and while he has published extensively on matters of public finance and contract theory, including recent research critiquing India’s agricultural export policy, there is not much literature around his thoughts on monetary policy and the RBI,” a Nomura report said.

“Dr Nagesh Kumar’s primary focus is on industrial policy, competitiveness, FDI and regional issues in South Asia, with recent commentary arguing for bolstering India’s manufacturing sector. However, like Prof Singh, he has not written much on monetary policy,” the report added.

Two external members of the previous MPC – Ashima Goyal and Jayanth Varma – had voted for a rate cut along with a change in stance in the last few policy review meetings.

Highlighting this background, a Barclays report said: “We think at least one of the new external MPC members may vote against the rate or stance at the meeting on October 9, despite it being their first meeting.” The report noted that the MPC has seen dissenting views on multiple occasions on rates and its policy stance in its relatively short history.

The market will also keenly watch if new external members’ opinions differ from the internal members. Varma, Goyal and Shashanka Bhide, the other external member of the previous MPC, shared their views in the media after the monetary policy minutes were published. It is to be seen if the new members continue that tradition.

After increasing interest rates by 250 basis points (bps) between May 2022 and February 2023, the domestic rate-setting panel has maintained status quo. The policy stance — withdrawal of accommodation — was also kept unchanged.

MPC will meet from October 7-9 amid a flurry of actions by leading central banks. The European Central Bank (ECB) implemented its second rate cut of the year, followed by a 50 bps cut by the US Federal Reserve, while the Bank of England and the Bank of Japan diverged, maintaining status quo.

RBI has resisted change in both rate and stance, citing volatile food inflation and slow progress of last-mile disinflation. RBI governor Shaktikanta Das also emphasised on hitting the 4 per cent inflation target.

Headline inflation for two consecutive months was below 4 per cent — in July and August. This is for the first time headline inflation undershoot RBI’s 4 per cent target for two consecutive months after 2019. Headline inflation, however, is again expected to be closer to 5 per cent in September, mainly due to an unfavourable base.

Internal MPC members unanimous, variation in external members' vote

The Second Monetary Policy Committee (MPC), with external members Shashanka Bhide, Ashima Goyal and Jayanth R Varma, was constituted in October 2020.

It decided outcomes of 25 monetary policies during the tenure. 

When the panel assumed office in October 2020, headline inflation was at 7.61 per cent, and when it is demitting office, the recent headline print stood at 3.65 per cent in August.

During its tenure, headline inflation peaked at 7.79 per cent in April 2022.

The policy rate – repo rate – was 4 per cent when the second MPC was constituted.

After increasing the repo rate by 250 basis points (bps) to 6.5 per cent between May 2022 and February 2023, the domestic rate-setting panel opted to keep the rate unchanged. 

While all the internal members of the MPC voted unanimously, both in case of rate action and stance, in all the 25 policies, voting pattern was much more varied among external MPC members.

External members voted differently seven times on setting the policy repo rate.

In terms of stance, the MPC voted differently on 17 occasions. External member Varma, professor of Indian Institute of Management, Ahmedabad, voted against a resolution on most occasions.

Michael Debabrata Patra is the only member who has been part of the MPC since its inception. He initially served as a central board-nominated member when he was an executive director, and currently is deputy governor in charge of monetary policy.

On Tuesday, the government appointed three external members to the highest rate-setting panel. 

These members are: Delhi School of Economics director Ram Singh, economist Saugata Bhattacharya, and Nagesh Kumar, director and chief executive, Institute for Studies in Industrial Development (ISID). 

Compiled by Anjali Kumari

How the Second MPC voted

Voting pattern of internal members 
 

 On rate: Voted unanimously in all 25 meetings

 On stance: Voted unanimously in all 25 meetings
 

Voting pattern of external members
 

 On rate: Voted differently on 7 occasions

 On stance: 17 of 25 policies saw external members vote differently