Much has been said and written on the status quo on policy rates by the RBI in its recent monetary policy review. Markets, analysts and many an academician were not convinced of the RBI not hiking the policy rate in the light of a depreciating rupee, rising oil prices, widening current account deficit and other global headwinds. But the inflation numbers and also projections for the next few months, even after accounting for potential oil price hike up to $96, were will within the mandated inflation rate of 6 per cent. So from inflation target perspective, the central bank may be justified of its action.

Both RBI and government mandarins have parroted that the exchange rate would be determined by market forces and they only manage volatility.

New legislative mandate

But there appears to be more than what meets the eye. Much as the status quo policy, the RBI’s responses in media interface appear to have rattled the markets. The apex bank justified status quo in policy rates amidst falling rupee and increase in oil prices by invoking the legislative mandate. What is this legislative mandate?

The RBI Act was amended in 2016 (IIIF- Sec45 Z) and a new chapter on monetary policy was introduced, whereby, the central government in consultation with the RBI shall determine the inflation target in terms of CPI, once in every five years. The Monetary Policy Committee (MPC) shall determine the policy rate required for achieving the inflation target and its decision is binding on the bank.

Not to leave a doubt, the new law makes it clear that the provisions of the new chapter on monetary policy override other provisions of the Act. As if to add emphasis, it modified the Preamble to the Act, by reiterating, among other things, that the primary objective of the monetary policy is to maintain price stability while keeping in mind the objective of growth.

To cap it all, the Cabinet Secretary chairs the selection committee of MPC members. The RBI Governor is only a member. Does it signify the government’s overarching interest to co-manage monetary policy, hitherto the exclusive domain of the RBI? The implications going forward are anything but comfortable.

Prior to the new law, the RBI has been pursuing multiple objectives and deftly managing the monetary policy trilemma — price stability, exchange rates and independent monetary policy. In fact, the middle path management of the trinity is a global best practice. Is this abandoned? From the response it is not clear whether the RBI would have liked a rate hike in terms of other monetary policy parameters but for the new legislative mandate/limitation?

In the past, the RBI has demonstrated its expertise in navigating far more serious turbulence in forex markets, global headwinds and one would assume that this is ensconced in institutional memory. But does the new legislation put shackles on the RBI independently managing monetary policy? A joint communiqué by the RBI and the government would help clear the air. The larger issue is not just no rate hike this policy round, but primacy of the RBI.

This reminds one of an incident in the UK some two decades ago. The BOE Governor, emerging from the MPC meeting, told the waiting media that he won the argument (to hike base rate) but lost the decision to the Chancellor of Exchequer. The rest is history.

The writer is a former CMD of a public sector bank.

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