Inexplicable lapse

The bi-monthly monetary policy meeting, scheduled to be held between Tuesday and Thursday (September 29-October 1), has been put off for want of a quorum of four in the six-member Monetary Policy Committee. The four-year term of three external members, appointed by the Centre, has come to an end, with the search committee failing to identify their replacements on time. Under Section 45ZD of the Reserve Bank of India Act, external members “shall hold office for a period of four years and shall not be eligible for reappointment”, which rules out an extension. Given the unprecedented crisis in the economy — GDP in decline for the first time in four decades; inflation at 6.7 per cent, above the ‘flexible inflation targeting’ band fixed for the MPC; and rising bond yields, amidst high government borrowings — the postponement of the MPC meeting could not have been more ill-timed. Even if the MPC holding rates is a foregone conclusion, its assessment of the economy after its first quarter debacle, its signal on how the RBI will manage government borrowings and its take on the global economy and markets, would have been a subject of crucial interest for market players and investors, both in India and abroad. Its statement also sends out signals on reserves management and the outlook on the rupee. Markets, businesses and consumers rely on the MPC’s outlook to make decisions.

The search committee that appoints MPC members — headed by the Cabinet Secretary, with the RBI Governor and Economic Affairs Secretary, among others, as members — would surely be aware of the adverse signals that the postponement of the MPC meeting undoubtedly sends. The lapse ends up conveying a perception of indifference towards the working of key autonomous institutions. Even if one assumes that the Centre was preoccupied with managing the pandemic, the process of filling these vacancies could have begun a few months back, given the due diligence it requires; the external members would require regulatory approvals to rule out conflicts of interest. Else, the criteria are not daunting; Section 45ZC of the RBI Act merely states that such members should be persons of “ability, integrity and standing” with knowledge of economics, banking and finance.

The Centre and MPC should be alert to another important timeline: reassessing ‘flexible’ inflation targets (4 per cent with a two per cent band either way) before they come up for review in March 2021. The issue of whether volatile, lockdown-induced food inflation should be played down in the CPI for inflation targeting, with only CPI ‘core’ being taken into consideration, is moot in the current context. More importantly, the pursuit of an inflation target to the exclusion of other goals has to be debated. Clearly, the Centre needs to get serious about the institutional nitty-gritty of policymaking.

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