On June 28, 2016, many newspapers had carried a news item on the formation of a Monetary Policy Committee by the Government of India. General public was grappling with the Brexit brouhaha and the announcement by the Government of India on the formation of MPC went almost unnoticed. A few serious ‘monetarists’ known to me were debating furiously on the MPC as if the world has come to an end. Some went to the extent of lamenting that the Reserve Bank has lost its autonomy and concluded that RBI has lost its identity.
What is MPC?
To understand the MPC, one should know what monetary policy is and what it means to you and I.
What is Monetary Policy?
Monetary policy refers to the policy of the Central Bank with regard to the use of instruments under its control to achieve the goals specified in the Central Banking Act. Monetary policy, one of the tools Central Banks / Governments have to affect the overall performance of the economy, uses instruments such as interest rates to adjust the demand for and supply of money in the economy. Monetarists believe that the objectives of monetary policy are best met by targeting the growth rate of the money supply. The following links provide useful resources on “Moetarism” and monetary policy respectively:
www.imf.org/external/pubs/ft/fandd/2014/03/basics.htm
www.imf.org/external/pubs/ft/fandd/2009/09/pdf/basics.pdf
Monetary Policy in India
The Reserve Bank of India (RBI) is vested with the responsibility of conducting monetary policy with the primary objective of maintaining price stability while keeping in mind the objective of growth.
Monetary policy decisions impact the stakeholders namely Investors, savers and borrowers besides having far reaching implications for the economy. High interest rates will be welcome by savers and investors whereas borrowers would clamour for low interest rates. Borrowers are also savers and savers may also be borrowers. Their expectations of the interest rates are, therefore, at loggerheads. How does the Reserve Bank juggle with such an expectation? A proper prioritisation is, therefore, warranted while conducting the monetary policy that would ensure price stability with growth.
The RBI adopted a ‘multiple indicator approach’ in April 1998. Under this approach, which is currently in practice, a number of variables such as money, credit, output, trade, capital flows and fiscal position as well as rate variables such as rates of return in different markets, inflation rate and exchange rate are analysed for drawing monetary policy perspectives. The multiple indicator approach relies on forward looking indicators since the early 2000s drawn from the RBI’s surveys of industrial outlook, credit conditions, capacity utilization, professional forecasters, inflation expectations and consumer confidence. The RBI continues to give indicative projections of key monetary aggregates.
Hope to see you soon…