RBI’s independent push to set reverse repo draws flak
Two former finance secretaries involved in shaping the monetary policy framework have criticized the Reserve Bank of India for setting the reverse repo, the rate at which the central bank absorbs excess liquidity, independently of the rate-setting panel.
The two former officials said the move encroaches on the remit of the six-member monetary policy committee (MPC) mandated by Parliament to set interest rates. But, RBI governor Shaktikanta Das has defended the decision, arguing that the decision on the reverse repo is not in the MPC’s domain.
However, on Thursday, deputy governor Michael Patra said RBI had been forced to reduce the reverse repo as an “out-of-the-box response” aimed at easing financial conditions in “pandemic times”.
To ensure that the monetary policy reforms are not rendered redundant, the finance ministry should issue a clarification and, if required, amend the RBI Act to prevent the central bank from setting the reverse repo rate inconsistently with the MPC’s decision on the repo rate, the former officials said.
Former comptroller and auditor general of India Rajiv Mehrishi, who, as finance secretary, signed the Monetary Policy Framework Agreement between the government and RBI, said: “To my mind, reverse repo is integral to monetary policy…it is a part of the “policy rate” referred to in the agreement signed between RBI and MoF (ministry of finance) in 2015”.
Arvind Mayaram, who was finance secretary before Mehrishi, said, “The reverse repo is not independent of the repo. The two are linked. Once the repo is set, the reverse repo is determined automatically. It is purely nit-picking for RBI to interpret the amended RBI Act to mean its setting of the reverse repo is not bound by the MPC’s decision on the repo”. Mayaram worked under finance ministers P. Chidambaram and Arun Jaitley to formalize the new MPC framework on recommendations given by a RBI panel headed by former governor Urjit Patel.
The MPC framework is aimed to reduce RBI’s discretion to set monetary policy. It envisages that the RBI governor ceases to be the singular deciding authority on policy rates. Instead, the MPC’s decisions were made binding on the RBI through amendments in the RBI Act.
However, in an interview last month, RBI governor Das told The Hindu Business Line that “it (the reverse repo rate) is not in the MPC’s domain. It is RBI that decides the reverse repo rate”. The statement followed after minutes of the August 4-6 MPC meetings showed Jayanth R. Varma, a non-RBI member of the MPC appointed by the Modi administration, expressed disagreement with the level of the reverse repo rate.
In his defence of RBI, Patra said the suggestion to adjust the reverse repo rate asymmetrically relative to the repo rate was from an external member of the MPC.
Mint spoke with two other former government officials who were directly involved at different stages of securing the MPC agreement with RBI and the amendments in the RBI Act through Parliament for operationalizing the new framework. Requesting anonymity, one said the government must issue a clarification to state unambiguously if or how much discretion RBI has about the reverse repo rate.