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Monetary Policy Making in India: Guidance from the Monetary Policy Committee

Ranjit Kumar Pattnaik

Author: Ranjit Kumar Pattnaik

Date: Wed, 2016-10-19 13:14

Our SPJIMR Blog is nearly a month old. I took some time to write. I was reminded of that age-old saying: “Before you write, think”. I pondered over this. Then I decided I would write for the student community at large. The topic I have chosen is Monetary Policy Making in India: Guidance from the Monetary Policy Committee.

Monetary Policy making in India has undergone a metamorphic transformation in many ways. First, the Reserve Bank of  India (RBI) Act ,1934, has been amended to state that the primary objective of monetary policy is price stability. Second, the monetary policy is operating currently under a flexible inflation targeting (FIT) framework with Consumer Price Index (CPI) both urban and rural as the measure to target Inflation. Third, the FIT memorandum jointly signed by the RBI and Government of India (GoI) has prescribed the inflation rate for India at 4 (+/- 2) per cent. Fourth, if the target falls below 2 per cent and goes beyond 6 percent for three consecutive quarters, the RBI will submit a written explanation citing the reasons for the deviation. Fifth, the operating target of monetary policy is the weighted average call money rate (WACR), the intermediate target is the inflation expectation (decided by the surveys and anchored by the RBI) and the ultimate target is price stability with a target of 4 (+/- 2) per cent.

Against the above backdrop, it is important to note that the monetary policy decisions are no more the Governor’s decisions. They are made by a committee known as the Monetary Policy Committee (MPC)  headed by the Governor with two remembers from RBI and three outside members nominated by the GoI. It may be further noted that the MPC was constituted under section 45ZB of the amended RBI Act, 1934.

It may be recalled that the MPC took a unanimous decision to reduce the Policy repo rate by 25 basis points to 6.25 per cent on October 4, 2016. As was pre announced, the minutes of the meeting were released to the public 14 days after the decision was taken. The minutes were released on the predetermined date, i.e, October 18, 2016. The following is the link to the minutes of the MPC meeting.


The minutes of the meeting is a public document with many unique features hitherto unknown in the history of monetary policy making, particularly from the angle of transparency. There are three aspects in the proceedings of the meeting viz; (a) resolution adopted at the meeting of MPC, (b) vote of each member, and (c) the statement/s of each member.

While the resolution part has already been covered in the policy statement of October 4, 2016, what is of interest is the statement and the voting pattern.

A common thread running in the statements of each member is that there are signs of revival of growth to move towards its potential level and even though the inflation concerns persist there is a likelihood of meeting the March 2017 target of 5 per cent CPI combined inflation rate. More Importantly, it is worth noting, as the Governor has noted, “The inflation target of 5 per cent could be achieved ... Nonetheless, inflation outcomes in Q4 will have to be carefully and continuously monitored as upside risks albeit lower now than before persist." Thus, there is a cautious optimism.

From the foregoing, the forward guidance by the MPC is that inflation expectation will play a crucial role as the intermediate target. There are thorny issues here! How to take a view on inflation expectation? Is it a household expectation survey? Is it a consumer confidence survey? Is it a model based survey? As evidence suggests, there could be diametrically opposite results from the surveys. Here comes the art of monetary policy making!!! 





The outcome of the survey on inflation expectation will highly depend on the sample space chosen. There is a chance that people will put their assumptions rather than the expectations. And when this survey outcome is put into the technical framework, the result may vary widely than what is expected. This might be a potential problem to the decision making input.

Nicely said sir, Yes India has taken bold steps by the so called demonetization recently! Everybody has suffered by standing in the Q and postponing our plans etc… To counter check on the unaccounted money or the black money in circulations, the real affect from the demonetization exercise on the economy would be known to us in few months down the line, yes by withdrawal of higher denomination have given jerk to the funding of anti social element or terrorism and the agency printing counterfeit note. But on the economy is a big question! We cannot say whether the fresh black money will not surface again, until and unless we have a stringent system and drive our economy by cashless transaction it would be tough to arrest the loophole and for this we really need to revamp our infrastructure and educate the masses for paperless transaction. The MPC inflation target of 4 (+- 2) need to wait and see. If the crude oil basket surge it could go haywire with uncontrolled CAD and by god forbid if that occurs what would be the impact on the inflation, do we really have the robustness in our economy to observe the shock! We need to revamp our system of accounting on the measure of GDP both on manufacturing & services by going close loop system like for any raw material input to factory should be tracked till the finished product comes out from the factory to the destination of market and the final consumer by this way we would have the real GDP measure & the inflation and by this way would ensure minimal leakages for evading taxes etc.

8th Feb 2017, everyone was eagerly waiting for the monetary policy after DEMONETIZATION, and looking for a reduction in repo rate to boost the economy after the hit of note ban. But the RBI governor failed to delight the people of nation with a unchanged Repo-rate of 6.25%. Even the policy stance was shifted to neutral keeping in mind the transitory effect of demonetisation. The target of inflation of 4% will be challenged by now increasing crude prices. Although the note-ban have resulted in inflow of liquidity in banking system but still raises a question on the fulfillment of the purpose it was initially intended for. Effect of demonitization was acknowledged but lowering the estimates of growth from 7.6% to 7.1%, which immediately showed it effect on the capital market and fall of the sensex.

Sir Thank you very much for sharing this interesting topic. A hot cake topic is illustrated by you Sir. Demonetisation a bold step taken by Narendra Modi Led NDA government to collect the untaxed money with what our economy or market is flushed out. It’s a remarkable step taken by Government of India One thing to recapitulate here that no money is black here but the money should be taxed in somewhere that is not done. Hence to remove this huge liquidity from market GOI has taken this bold step. Meanwhile peoples suffering to collect cash for their daily livelihood has become a tough challenge. We all know that our economy is very much cash dependent. Within some couple of day or month we cannot wipe out all hard notes from market to make it a plastic money market. Surplus cash in public’s hand will go into capital reserve and there will be a correct measure of liquidity in market in present date. In developed countries like UK, Belgium 80% or above out of total transaction payment is done through NEFT/Plastic money. By January 2016, it was supposed to keep inflation below a target of 6% and next below 5% by March 2017. However The demonetization that has been in effect since 9th November 2016 is expected to have a negative impact on inflation. Public or consumers are refraining from making any purchasing except if it is essential from consumer staples. If we look at real sector that incorporates a lot of cash transactions slowed down significantly. There is up to 30% fall in house prices even in tier-1 cities. For Demonetization a huge amount of cash will be deposited in banks, which will enhance the capacity of Bank to lend money to customers in spite of asking money from RBI. So due to lower demand , RBI will reduce the repo rate to influence the demand in market . At most we can say not so much good or even bad Demonetization can be a mixed blessings to our economy and GDP growth.

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