What transpired at RBI's rate advisors' meet: Rajan proved he is his own man, yet again

Majority of the members of a technical advisory committee (TAC) of the Reserve Bank of India (RBI), which met six days prior to the 30 September monetary policy review meeting voted in favour of a rate cut.

Three of the seven external members of the committee said the RBI should cut its key lending rate, repo rate, by a quarter percentage point in the backdrop of weak industrial demand and high levels of unemployment in the country, while one sought an even higher 50 basis points (bps) cut, saying the RBI has already achieved the inflation targets in the near term. One bps is one hundredth of a percentage point.

But RBI governor Raghuram Rajan chose to go ahead with his decision to hold rates, overruling the majority view.

Ever since the RBI began to make public the minutes of the TAC in February, 2011, the outcome of such meetings has consistently provided some interesting insights into the apex bank’s style of functioning.

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The policy decisions were never outcome of a democratic method and the final word has been that of the governor.

That trend was visible this time as well.

Nine out of 10 times, the majority opinion of TAC meetings, hasn’t had any serious impact on the policymaking process and the ‘opinion’ of the governor almost always prevailed.

Two, like never in the past, the central bank is unswerving in its stated policy stance of inflation fight ever since Rajan took over in September, 2013, identifying inflation as a bigger threat over slowing growth, no matter what the rest of the world, including the incumbent government, thought what the RBI should do time to time with rate tools.

To get a clearer picture, consider the macro economic scenario that was available before the RBI governor before drafting the policy document this time.

In simple words, the headline consumer price index inflation (CPI), the key price indicator the central bank tracks for monetary policy formulation, had already begun easing in the recent months, except for food inflation that still stood high.

There were no major signals of growth picking up yet in industrial production and investment scenario that would have significantly added to the growth momentum.

On the other hand, there was a huge clamour from industry and politicians for rate cut, who argued that inflation cannot be the single-minded focus of the central bank in a sagging economy.

But Rajan chose what he thought is better for the economy beyond the near term. To be sure, RBI governor is under no obligation to go by the TAC. It is just an advisory body that has never played any serious role in the monetary policy making ever since it was formed.

In the past, the RBI top brass has devoted much time in public to establish that how lower inflation is a necessary condition to sustain stable growth in the Indian economy. Perhaps it is that freedom and conviction of the central bank to act what it fundamentally thought right, safeguarded the economy from major mess in the price situation of the country.

This time too, Rajan has proved he is his own man yet again, for what he believed what is good for the larger economy, unlike some of his predecessors, who were more of men of consensus.

In the past, many economists had pointed out that had the central bank begun the inflation fight much earlier than it did, inflation expectations would not have aggravated to the current level warranting such stricter actions.

The current way monetary policy operates, including the charted course of inflation fight by the Rajan and team, may change when the new monetary policy framework kicks in from the next fiscal, when the government will then take the driving seat in the inflation fight, while the role of the RBI will be limited to achieving that target.

In other words, hypothetically speaking, if the members of the new panel that would set the inflation target for the government under the new monetary policy framework, were the same as the current TAC, the story of policy outcome would have been different and may not be a pleasant one for the central bank.