RBI takes Fed route on monetary policy

MPC will meet on Oct 3 & 4, before announcing rates at 2.30 pm on Day 2

The Reserve Bank of India (RBI) will now walk the Federal Open Market Committee (FOMC) way of deliberating on monetary policy for two days before delivering their verdict.

And so, the six-member monetary policy committee (MPC) will be meeting on October 3 and 4, before letting the markets know about their collective decision on policy rates at 2.30 pm on the second day, just an hour before the equity markets close, but well before the closure of the bond and currency markets at 5 pm. So far, the central bank conveyed its decision at 11 am on the policy day. Aided by RBI’s research team and advised (nonbinding) by a committee of experts on monetary policy, the governor had the last say on policy.

The resolution of the MPC will be placed on RBI’s website at 2.30 pm on October 4. This would be followed by a press conference at 2.45 pm, RBI said on its website. The three external members of the MPC are Chetan Ghate, professor, India Statistical Institute; Pami Dua, director, Delhi School of Economics; and Ravindra H Dholakia, professor, Indian Institute of Management (Ahmedabad). They will hold office for a period of four years, or until further orders. But with the monetary policy in place, the central bank governor will be just one of the six members, albeit with a casting vote in case of a tie in member votes. This is exactly what the FOMC does in case of US Federal Reserve meetings, but the key difference is that the FOMC meets once in a quarter and the RBI’s practice is to meet twice in a quarter. The frequency of the meeting changed several times under different governors, and it won’t be surprising if the central bank goes back to the old practice of holding policy meetings once a quarter, say economists.

“It remains to be seen if with a two-day deliberation in place, if the frequency of the monetary policy is sustained as it is,” said SBI chief economist Soumya Kanti Ghosh.

Ghosh also pointed towards an interesting paper on committee-led monetary policy by American economist Alan Blinder where he proved that even in a committee approach, the governor always prevails.

In his paper, Blinder had this to say on the FOMC meetings: “The distinction between individual and group decision making, while clean in theory, can be fuzzy in practice. Many central bank policy boards do not reach decisions by literal majority vote. Committees have chairmen, who may dominate the proceedings,” the paper ‘Monetary Policy by Committee: Why and How’ says.