Performance of MPC 1.0 between 2016 and now explained in three charts

The economy and the affairs between RBI and govt were tumultuous in the four years to 2020. Business Standard takes a look at MPC's performance and its consonance with major macroeconomic indicators

The Reserve Bank of India constituted its first Monetary Policy Committee in 2016, the three original external members oh which will be replaced by new members soon, changing its composition. The economy, as well as the affairs between the RBI and the government, went through a tumult in the four years to 2020, the MPC's first inning. Business Standard takes a look at MPC's performance and its consonance with major macroeconomic indicators. 

As the first term of RBIs monetary policy committee approached its end, the economy took a turn for the worse. GDP growth had tumbled to a multi-year low, and the committee focused more on growth than on inflation, which is its clear “target”. Gross domestic product grew 3.1 per cent in the June quarter, as manufacturing and construction collapsed, along with private investments. 

Inflation was largely under control in the tenure of the first MPC. But it went above the upper band of 6 per cent with economic growth started faltering, much before Covid-19 shook India’s economy, data shows. Benchmark long term government bond yield did not fall until RBI aggressively pumped liquidity under long term repo operations. But it has then remained sticky, reflecting low confidence after a severe-then-expected fall in GDP in Q1. 

Long-term interest rates in the economy remained conspicuously hard as the RBI’s MPC initiated a rate cut cycle from the beginning of 2019. The yield on 10-year government bonds softened only after the RBI pushed its policy response to the pandemic. But months into the economic fallout, G-Sec yields are showing signs of hardening again. The new members in the MPC will inherit a complex play of interconnected numbers in the economy, similar to what the first group experienced.