India’s Second MPC: The Known, The Known-Unknown And The Unknown

India's second Monetary Policy Committee may see a more diverse mix of views, with the three external appointees coming from specialisations such as macroeconomics, macroeconomic modelling, agricultural economics and financial markets.

On Monday, the government said Ashima Goyal, Jayanth R Varma and Shashanka Bhide will join the six-member panel for a four-year period. They will replace Chetan Ghate, Pami Dua and Ravindra Dholakia, whose term ended after the August MPC meeting. The meet scheduled for October was deferred due to a delay in the appointment of the new external members.

“I do not see much change in the composition. In the previous group, you had a macroeconomist (Chetan Ghate), macro-modeller (Pami Dua) and regional economist/public finance expert (Ravindra Dholakia). Now you have Ashima Goyal (macroeconomist). Shashanka Bhide (macro-modeller) and JR Varma (financial expert),” said M Govinda Rao, a former member of Fourteenth Finance Commission.

According to Rahul Bajoria, chief India economist at Barclays, the government has once again selected all three external members from academia. “Looking at their past track record, the newly constituted members bring in expertise in macroeconomics, agriculture, development economics and financial markets to policy deliberations,” Bajoria said.

Also Read: Next MPC Meet Scheduled For Oct. 7-9

The Known

Of the three new members, the markets will be most familiar with Goyal and her views, which are often seen as ‘dovish'. Apart from having been a member of Prime Minister's Economic Advisory Council, Goyal is a frequent commentator on economic affairs.

In an article in Springer in August 2020, Goyal had argued that the Covid-19 crisis necessitates a large macroeconomic stimulus. In order not to overstrain government finances, it should be targeted, temporary and self-limiting, the article argued. It went on to say that large government assets can be monetised to help restructure towards more effective government spending.

In a paper written in June 2020 for the Journal of Economic Asymmetries, Goyal, along with co-author Deepak Kumar Agarwal, had highlighted the importance of liquidity in the Indian and emerging market environment. There is an “important asymmetry in monetary transmission for emerging markets in the special role of liquidity in comparison to rates,” Goyal and Agarwal had said.

Together, the two authors had argued against the Reserve Bank of India's view of using the call money rate as the guiding rate to judge liquidity conditions. Instead, they had supported a move towards a liquidity stance, which is “aligned to the cycle”, suggesting that liquidity should be surplus in an easing rate environment and deficit in a tightening interest rate environment.

The Known-Unknown

Varma is well known in financial market circles, having been formerly associated with India's capital market regulator. He is an active blogger on a wide array of subjects. Yet, his view on pure monetary policy and interest rates are not well known since he has rarely commented on those subjects.

In April 2020, Varma did call for the pre-emptive recapitalisation of the Indian financial sector.

“Under normal conditions, we want financial firms to have enough capital to assure their survival. In the aftermath of Covid-19, we would want much more. We would want financial firms that are ready to lend to companies that seek to rebuild their businesses, and to individuals trying to rebuild their lives,” Varma wrote. “We would not want financial firms that bunker down and try to conserve their capital because they are scared about their own survival,” he said.

The call matched the RBI's repeated reminders to lenders to build a capital base. While private sector banks have raised funds, many government-owned lenders and NBFCs have not done so.

At the peak of the Covid-19 crisis, when the RBI was forced to introduce a special liquidity window for mutual funds, Varma had argued that such a facility would not be enough. The mismatch being faced by mutual funds could only be solved by a combination of two things, he wrote. “The liquidity of the assets could be improved by a market maker of last resort, or redemption could be restricted.”

The Unknown

Bhide will be the relatively unknown entrant into the MPC. Much of his work has been in the area of agricultural economics and poverty. While Bhide is senior adviser of research programmes at the National Council of Applied Economic Research in Delhi, much of his published work is from many years ago.

Bhide is known for his macro-modelling work, although his Ph.D was in agricultural economics, Govinda Rao said.

“I think it is a good thing that the government continues to hold on to people with different backgrounds. For instance, it is unclear what impact the food and agriculture reforms and shake-up of the APMC system will have on inflation going forward. So it is good to have someone on the MPC team with experience on agricultural modelling,” said Hugo Erken, head of international economics at RaboResearch.

No Immediate Change In Policy View

Economists don't see an immediate change in policy directions with the new MPC appointments.

The new appointments will not dramatically change the near-term monetary policy outlook, said Bajoria. “Given our new inflation forecast trajectory, we believe that room to cut rates further will likely open up only in Q1 2021.”

The new choice of members lends a slightly more dovish bias to the MPC compared to the past external members, said Kaushik Das, chief India economist at Deutsche Bank.

Priyanka Kishore, head of India and South East Asia Macro at Oxford Economics, shared that view. “In the short-term, I do not see it impacting the leanings of monetary policy in a significant manner. A temporary pause, followed by rate cuts, remains the central view given the strong concerns around recovery path.” Kishore said.