India’s government injected more uncertainty into the economy this week by failing to act in time to appoint members of the central bank panel that decides interest rates.
The Reserve Bank of India postponed its three-day interest rate meeting that was due to start on Tuesday, giving no reason or a new date for its policy decision. The six-person Monetary Policy Committee is currently without three outside members after their terms expired last month. The rules require that at least four members of the MPC be present at a meeting.
The government did not take sufficient time to appoint new members of the MPC, which caused further confusion in the financial markets. The RBI has been doing most of the heavy lifting to provide stimulus to the economy this year, given the limited fiscal space available to the government of Prime Minister Narendra Modi.
“This is chaotic,” said A. Prasanna, chief economist at ICICI Securities Primary Dealership Ltd. in Mumbai. “The government and the RBI had at least three months time to appoint members and yet they have not succeeded. Monetary policy was the only lever that supported the economy and such uncertainty does not help. “
The MoneyControl website reported that the government has selected the new MPC members, but has been delayed in announcing them until it completes processes such as background and security checks. The new MPC could meet next week, the website said, citing a senior government official.
This week’s rate decision was due to be announced on Thursday, and most economists predicted that the RBI would keep its benchmark interest rate unchanged at 4%. The RBI had cut rates 115 basis points this year and injected billions of dollars of liquidity into the financial system to support the recovery.
One-month dollar-rupee undeliverable forwards changed little to 73.99 at 6:54 am in Mumbai.
The government delays are not limited to just MPC appointments, with authorities moving slowly to provide fiscal support. Finance Minister Nirmala Sitharaman released a 21 trillion rupee ($ 285 billion) economic package in May, equivalent to 10% of gross domestic product, but the actual fiscal cost stood at about 1% of the total. GDP. That prompted many, including Governor Shaktikanta Das, to call for more encouragement, but little has been reported to date.
Anurag Thakur, the junior finance minister, said in June that the government was still considering increased support, and that although “the announcements have stopped, action towards implementation continues.”
The economy posted a record 23.9% contraction in the June quarter from a year earlier, the largest among all the major economies analyzed by Bloomberg. Goldman Sachs Group Inc. predicts that the economy will contract 14.8% in the fiscal year through March 2021.
Modi’s management is due to announce its loan for the second half of the financial year this month, and it is expected to increase it further from a record 12 trillion rupees.
Long process
In India, government appointments to key positions, from heads of state banks to RBI deputy governors, can be a long and time-laden process.
The central bank had written to the government earlier this year to extend the tenor of the three external members of the MPC – Chetan Ghate, Ravindra Dholakia and Pami Dua – in order to maintain continuity of policy during the pandemic. Instead, the government formed a panel to select new members, people with knowledge of the matter said in July.
“One hopes that the government will recognize the urgency of the matter,” said Rudra Sensarma, professor of economics at the Indian Institute of Management in Kozhikode. It is “surprising that the government has not decided on the new appointees, which is of the utmost importance to preserve the credibility of the RBI’s decision-making,” he said.
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