Monetary policy panel will bring more transparency

But a retail inflation target of 4% will not be easy to achieve

The formal constitution of a Monetary Policy Committee (MPC), which will decide on the Reserve Bank of India’s benchmark interest rates, ends an over seven-decade-long tradition that vested this power with the governor. The three academic economists appointed by the Centre will join three representatives from the RBI to the MPC, with the governor being only one out of the six responsible for setting the central bank’s policy rates. The current governor, Urjit Patel, is known to keep a low profile, unlike his illustrious predecessor, Raghuram Rajan, and, to that extent, may seem to fit more easily into the new institutional arrangement where the governor, while having a casting vote in the event of a tie, cannot veto a majority decision.

The MPC — which may well decide whether interest rates are to be cut or not in the next policy review on October 4 — has its work cut out. On the face of it, its mandate is simple — to implement the new framework agreement mandating the central bank to achieve a retail inflation target of four per cent, plus or minus two percentage points. But that is easier said in a country where a significant chunk of inflation has to do with food prices, on which there is not much that monetary policy can do. But having said that, an MPC should still lead to a more transparent method of determining interest rates, based on the opinion of not one, but six wise persons.