RBI's 'reckless' delay on policy panel holds back recovery

By Anirban Nag

India’s government injected more uncertainty into the economy this week, failing to act in time to appoint members to the central bank’s panel that decides interest rates.

The Reserve Bank of India deferred its three-day interest-rate meeting due to start Tuesday, without giving any reasons or a new date for its policy decision. The six-person Monetary Policy Committee is currently without three external members after their terms expired last month. Rules require at least four MPC members to be present at a meeting.

The government failed to make use of the ample time it had to appoint new MPC members, sowing more confusion into financial markets. The RBI has been doing most of the heavy lifting in providing stimulus to the economy this year, given limited fiscal room available to Prime Minister Narendra Modi’s government.

“This is not about the timing of the MPC meeting,” said Vishnu Varathan, the head of economics and strategy at Mizuho Bank Ltd. “Rather, it is about reckless neglect at a time when the economy cannot afford policy fumbles.”

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A panel tasked with picking the new policy makers has provided recommendations to a ministerial group dealing with the appointments, and an announcement is expected soon, according to a member of the panel who asked not to be identified as the details are private. Modi needs to sign off on the choices, the person said.

There was no clarity on what could have held up the appointments. Cogencis newswire reported that the delay was broadly owing to differences within the panel. MoneyControl website said it was due to background and security checks that had to be concluded on new members and the MPC could meet as early as next week.

K.S. Dhatwalia, a spokesman for the government, didn’t respond to a call on his mobile phone for comment.

This week’s rate decision was due to be announced on Thursday, with most economists predicting the RBI would keep its benchmark interest rate unchanged at 4%. The RBI had cut rates by 115 basis points this year and pumped in billions of dollar of liquidity into the financial system to support the recovery.

The yield on the benchmark 10-year sovereign note was up 2 basis points to 6.07% Tuesday.


The government’s delays are not just limited to MPC appointments, with authorities moving slowly to provide fiscal support. Finance Minister Nirmala Sitharaman in May unveiled a 21 trillion-rupee ($285 billion) economic package, equivalent to 10% of gross domestic product, but the actual fiscal cost worked out to just about 1% of GDP. That prompted many, including Governor Shaktikanta Das, to call for more stimulus, yet little has been forthcoming to date.

Anurag Thakur, the junior finance minister, said in June the government was still considering further support, and that while “announcements have been paused, action toward implementation continues.” More than three months later, the needle has moved little with Sitharaman, in separate interviews Tuesday, saying that she’s open to providing more support to the economy.

The economy posted a record 23.9% contraction in the June quarter from a year ago, the most among all major economies tracked by Bloomberg. Goldman Sachs Group Inc. is predicting the economy will shrink 14.8% in the fiscal year through March 2021.

The Modi administration is due to announce its financial year second-half borrowing this month, and is expected to further increase it from a record 12 trillion rupees.

Lengthy Process
In India, appointments to key positions by the government -- from heads of state-run banks to deputy governors at the RBI -- can be a lengthy process fraught with delays.

The central bank had earlier this year written to the government to extend the tenor of the three external members of the MPC -- Chetan Ghate, Ravindra Dholakia and Pami Dua -- in order to maintain continuity in policy during the pandemic. The government instead formed a panel to select new members, people with knowledge of the matter said in July.

“This is shambolic,” said A. Prasanna, chief economist at ICICI Securities Primary Dealership Ltd. in Mumbai. “The government and RBI had at least three months time to appoint members and yet they have failed. Monetary policy was the only lever providing support to the economy and such uncertainty doesn’t help.”