Oct 19, 2016

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

Prof. R K Pattnaik

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!!!

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