Rajan passes on rate-setting regime to panel

TNS & Agencies

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Mumbai, August 9

The Reserve Bank of India may decide its interest rates through the monetary policy committee (MPC) in October, outgoing RBI Governor Raghuram Rajan said on Tuesday, shortly after leaving key repo rate unchanged.

The repurchase (repo) rate, the rate at which the RBI lends to banks, remains unchanged at 6.5 per cent. The cash reserve ratio (CRR), the quantum of funds (either in cash or deposits) scheduled banks have to mandatorily park with the central bank, also remains unaltered at 4 per cent of deposits.

Rajan, who demits office after completing his three-year term on September 4, said that half of the six-member monetary policy committee was already in place and the government would name its nominees shortly.

Under the changes, passed by Parliament last month, the MPC will set interest rates by the majority, with a casting vote for the RBI Governor in the event of a tie. 

“I think there is some likelihood that the next decision will be made by the MPC rather than an individual. If that is the case, there would be six persons sitting together and deciding what the path of interest rates will be. I think, we should expect them to take an independent decision and I am sure they will,” Rajan said.

He said except the selection of three members that the government had to decide on everything was in place. “The process has already started. It is not going to take a long time to do that,” he said at the post- policy press conference. On the RBI’s side, Rajan said, the Board has selected Michael Patra to be the RBI Board nominee on the MPC. The other two members from the RBI will be the Governor and the Deputy Governor in charge of the monetary policy.

The other three members will be appointed by the Central government, on the recommendations of a search-cum-selection committee, which will be headed by the Cabinet Secretary.

“With the formation of the MPC, the government and the RBI have completed a fundamental institutional reform, which modernises India's monetary policy framework and builds a platform for strong and sustainable growth,” Rajan said.

On his last monetary policy update, he said, “In view of the configuration of risks (hike in food prices, good monsoon and others), it’s appropriate for the RBI to keep the policy repo rate unchanged at this juncture, while awaiting space for action. The stance of monetary policy remains accommodative and will continue to emphasise adequate provision of liquidity.”

Rajan also said easy liquidity conditions are now prompting banks to modestly transmit the past policy rate cuts of the central bank on to customers and that pro-active liquidity management by them should facilitate more such pass-through.

Lot of scope for rate cuts in coming months: India Inc 

The economic situation is improving and a further cut in policy rate at this juncture would have been well-timed.  A further push to demand through lowering of interest rate would have translated into higher investments. I hope the RBI will continue to work on improving the transfer of benefits of previous rate cuts — Harshavardhan Neotia, FICCI president

The RBI’s decision to maintain status-quo was as per market expectations. We believe transmission of rates will happen gradually over the next few months as credit growth picks up pace. The decision to frontload liquidity provisions through an announcement of open market operations is a well thought-out move. — Arundhati Bhattacharya, chairman, State Bank of India 

The baton now passes on to the next Governor and, probably, the MPC from the next meeting. We do not expect much shift in stance with the government setting the inflation target at 4 per cent with 2 per cent band on either side. We pencil in 25 basis points for the rest of FY2017. — Kotak Institutional Equities