Two former finance secretaries concerned in shaping the financial coverage framework have criticized the Reserve Bank of India for setting the reverse repo, the rate at which the central financial institution absorbs extra liquidity, independently of the rate-setting panel.
The two former officers stated the transfer encroaches on the remit of the six-member financial coverage committee (MPC) mandated by Parliament to set rates of interest. But, RBI governor Shaktikanta Das has defended the choice, arguing that the choice on the reverse repo isn’t within the MPC’s area.
However, on Thursday, deputy governor Michael Patra stated RBI had been pressured to cut back the reverse repo as an “out-of-the-box response” geared toward easing monetary circumstances in “pandemic times”.
To make sure that the financial coverage reforms usually are not rendered redundant, the finance ministry ought to concern a clarification and, if required, amend the RBI Act to forestall the central financial institution from setting the reverse repo rate inconsistently with the MPC’s choice on the repo rate, the previous officers stated.
Former comptroller and auditor normal of India Rajiv Mehrishi, who, as finance secretary, signed the Monetary Policy Framework Agreement between the federal government and RBI, stated: “To my mind, reverse repo is integral to monetary policy…it is a part of the “policy rate” referred to within the settlement signed between RBI and MoF (ministry of finance) in 2015”.
Arvind Mayaram, who was finance secretary earlier than Mehrishi, stated, “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 labored below finance ministers P. Chidambaram and Arun Jaitley to formalize the brand new MPC framework on suggestions given by a RBI panel headed by former governor Urjit Patel.
The MPC framework is aimed to cut back RBI’s discretion to set financial coverage. It envisages that the RBI governor ceases to be the singular deciding authority on coverage charges. Instead, the MPC’s selections had been made binding on the RBI by amendments within the RBI Act.
However, in an interview final month, RBI governor Das instructed 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 assertion adopted after minutes of the August 4-6 MPC conferences confirmed Jayanth R. Varma, a non-RBI member of the MPC appointed by the Modi administration, expressed disagreement with the extent of the reverse repo rate.
In his defence of RBI, Patra stated the suggestion to alter the reverse repo rate asymmetrically relative to the repo rate was from an exterior member of the MPC.
Mint spoke with two different former authorities officers who had been straight concerned at totally different levels of securing the MPC settlement with RBI and the amendments within the RBI Act by Parliament for operationalizing the brand new framework. Requesting anonymity, one stated the federal government should concern a clarification to state unambiguously if or how a lot discretion RBI has concerning the reverse repo rate.