RBI policy

What should we understand from Economist Surjit Bhalla’s criticism of the MPC?

On 06 Mar 17, noted economist Dr. Surjit Bhalla launched a scathing attack on RBI and the Monetary Policy Committee (MPC). He questioning why policy interest rates (repo rates) were not reduced, in the MPC bi-monthly review meeting, on 08 Feb 17.

Why should there have been a Reduction in Policy Rates?

Dr. Bhalla pointed out that after the Oct 16 meeting of the MPC, the RBI had reduced the policy rate by 25 basis points, to 6.25%. At that time, the RBI stated that it was targeting a real policy rate of 125 basis points above target inflation. Thus, if target inflation rate of 4.5% were considered sustainable, the target policy rate should be no more than 5.75% (4.5%+ 1.25% = 5.75%). Hence an easing of interest rates, by at least 50 basis points was easily sustainable.

Emphasizing the point, Dr. Bhalla pointed out that monthly inflation rates for Oct, Nov and Dec 2016 were 4.2%, 3.6% and 3.4%, respectively. Thus, there was scope to reduce interest rates even more; and even up to 100 basis points.

What is the MPC?

On 30 Sep, 2016, the GOI notified the constitution of the six-member MPC. It comprises the Governor of the RBI with two other RBI members and three persons of eminence, nominated by the GOI. The current nominated members are Professor Chetan Ghate, Indian Statistical Institute; Professor Pami Dua, Delhi School of Economics and Professor Ravinder H Dholakia, IIM Ahmedabad.

Why did the MPC Recommend a Change in Stance?

Though the MPC did not recommend any changes in the policy rate, they did approve a change of stance, from ‘accommodative’ to ‘neutral’. The vote was unanimous but two of the three non-RBI members, chose not to vote.

Monetary policy trends for the future are indicated by the stance adopted. Stances adopted may be accommodative (dovish) or neutral or hawkish. An accommodative stance indicates that inflation is expected to come down and money supply is likely to be increased by lowering interest rates. In Oct 16, the MPC indicated an ‘accommodative’ stance and recommended a lowering of the repo rate from 6.5% to 6.25%. The ‘neutral’ stance indicates stability, with no immediate intentions to change money supply. This is the stance, now adopted by the MPC. A ‘hawkish’ monetary policy stance, indicates an expectation of inflation and the potential need to restrict money supply, by increasing interest rates.

With inflation rates coming down, why did the MPC recommend a change in stance from ‘accommodative’ to ‘neutral’?


India’s Oil Import Bill. In 2015, international Crude Oil prices hit a historic low of US$ 27 per barrel. Prices have since risen and crossed the US$ 50 per barrel barrier. In 2017, Crude Oil prices are expected to remain near the US$ 60 per barrel mark. For the last two years (2014-15 and 2015-16), the Indian budget received successive windfalls, from falling international prices of Crude Oil. In 2016-17, a 12-13% increase in India’s import bill is expected and a further increase is expected for 2017-18.

Impact of Demonetization. The Demonetization exercise had a profound impact on India’s rural economy and the unorganized sector. While the economy is being remonetized, the impact of the contraction is unpredictable and may have secondary effects.


The MPC is being cautious on account of India’s Oil Import bill and the secondary effects of demonetization. Dr. Bhalla’s criticism of the MPC is perhaps directed to elicit more information on the economy.