The government on Thursday appointed three members to the monetary policy committee (MPC), completing the appointment process for the body which will soon be responsible for making decisions on monetary policy. The Reserve Bank of India’s (RBI) upcoming monetary policy review in October is likely to be conducted by the MPC, said a finance ministry official.
In a notification, the government said that Chetan Ghate, Pami Dua and Ravindra Dholakia will be the three nominees on the committee. They will join Urjit Patel, Governor, RBI, R Gandhi, deputy governor in-charge of monetary policy and Michael Patra, executive director at the RBI on the committee.
All three members have been appointed for a period of four years.
Who Are The New MPC Members?
Among the three members appointed to the monetary policy committee is Chetan Ghate, who is currently an associate professor at the Indian Statistical Institute. Ghate describes himself as a macroeconomist with a research focus on “economic growth, fluctuations, economic development, and monetary and fiscal policy in developing and emerging market economies.”
His recent research work listed on his university website includes a paper on fiscal policy, debt and business cycles in emerging market economies. He also has upcoming research work on “Monetary policy in India - A modern macroeconomic perspective.”
Ghate was part of the Urjit Patel-led committee which recommended that India move towards an inflation targeting regime. The committee had also suggested that a monetary policy committee be set up. As such, Ghate is seen as a supporter of the new framework where the retail inflation target of 4 percent (+/- 2 percent) will drive interest rate policy.
Pami Dua heads the department of economics at the Delhi School of Economics. Her research work is wide-ranging, including the impact of weather shocks on agricultural commodity prices in India, and capital flows and exchange rates in India.
Dua is a macroeconomist and also a student of econometrics. She has been involved with the Economic Cycle Research Institute in developing leading indicators for the Indian economy. Dua is seen as someone who would be driven by data in policy-setting.
Ravindra Dholakia has been on the faculty of Economics at IIM Ahmedabad since 1985. He lists his areas of research as microeconomics and macroeconomics. His current research and consultancy interests are in the fields of demand analysis and forecasting, social cost benefit analysis and analysis of macroeconomic environment and policy.
Dholakia’s published research suggests that he believes there is a short term trade off between growth and inflation which must be taken into account while setting monetary policy. Former RBI governor Raghuram Rajan had argued that this trade off is a misconception as low and stable inflation is essential for sustainable growth.
How The MPC Functions
Starting October, the six member committee will decide on monetary policy. Each member of the MPC will have one vote. The RBI governor will have a casting vote in the case of a tie.
The MPC replaces the current system where the RBI governor is the sole authority responsible for setting monetary policy although a technical advisory committee does advise on the course that monetary policy should take.
The MPC framework was recommended by the Urjit Patel committee on monetary policy although they had suggested a slightly different composition. The Urjit Patel committee was in favour of a five-member committee which would have three RBI members and two external members who would be nominated by the RBI leadership.
After a period of negotiation, the RBI and the government agreed on a 6-member committee with three RBI members and three external members to be appointed by the government. The RBI governor was given a casting vote.
The government wanted to ensure that the MPC members are at arm’s length from the government in order to set a healthy precedent, said the finance ministry official quoted above.
“This completes the process of modernising Indian central banking and making it more participative,” said D.K. Joshi, chief economist at CRISIL. “The members chosen are all very familiar with the Indian economy and will have no trouble settling into the new framework,” he added.