Dr. Raghuram G. Rajan: We held the policy rate at 7.25 per cent as we await data on whether recent increases in inflation, including in non-food items, are temporary, and whether the monsoon will continue to be near-normal. We note the recent fall in oil prices, which will be beneficial for India. As we await greater transmission of our frontloaded past actions, we will monitor developments for emerging room for more accommodation.

Framework for FPI Limits in Debt Securities

The Reserve Bank is talking to the Government about a Medium Term Framework for FPI limits in debt securities. This will include:

1. A target of what fraction of the sovereign bond market will be constituted by FPIs in the medium term;

2. Announcement of staggered changes in limits every six months and these being released on monthly/quarterly basis;

3. Limits to be specified in Rupees so that they do not vary with exchange rate movement;

4. The Framework will create space for participation of different kinds of investors (long term investors, such as, Pension Funds and Sovereign Wealth Funds as well as medium term investors and those coming through International Central Security Depositories, such as, Euroclear and Clearstream).

5. The overall goal will be to enlist FPIs in market development within prudential limits, even as they are attracted by rates available on Indian bonds.

Once the Framework is decided, we will wait for suitable market conditions, including possibly greater certainty about Federal Reserve actions and appropriate liquidity conditions in Indian markets, before making a public announcement.

Payment/Banks Small Finance

The Reserve Bank has received recommendations from the External Advisory Committees on Payment Banks chaired by Dr. Nachiket Mor and on Small Finance Banks chaired by Smt. Usha Thorat. Now an internal committee of the Reserve Bank, composed of its Deputy Governors and the Governor, is going through each of these applications again. Finally, a set of recommendations will be presented to the Reserve Bank Board, which will decide the final list of successful applicants. I hope to announce at least one set of bank licences before the end of the month.

Report on Urban Cooperative Banks

I have just received the report of the High Powered Committee on Urban Cooperative Banks. Much as the Urjit Patel Committee, the P.J.Nayak Committee and the Nachiket Mor Committee reports, I believe this will inform our actions in the months to come.

Monetary Policy Committee

There has been a lot of commentary about the composition of the Monetary Policy Committee. Let me say at the outset that the Reserve Bank believes institutionalising the process of monetary policy formulation is vital, given that the Government has given the Reserve Bank a clear inflation objective.

We have already done a lot internally in the past to institutionalise the process, including having scheduled meetings with different constituencies before the policy decision, having serious discussions with internal staff based on incoming economic data and our models, and speaking with the Government to obtain its viewpoint. The final policy is usually a consensus arrived at by the Governor, the Deputy Governor in charge of monetary policy, and the Executive Director in charge of Monetary Policy, but ultimately the responsibility is that of the Governor's.

Going forward, there are at least three virtues of taking the decision away from the Governor and giving it to a committee.

First, a committee can represent different viewpoints, and studies show that its decisions are typically better than an individual’s;

Second, spreading the responsibility for the decision can reduce the internal and external pressure that falls on an individual; and

Third, a committee will ensure broad monetary policy continuity when any single member, including the Governor, changes.

So we have been enthusiastic supporters of the idea of a committee. Since the Finance Minister’s budget announcement that such a Monetary Policy Committee would be formed, we have been engaged in dialogue with the Government. From the Reserve Bank’s side, we wanted that the structure should ensure continuity in policy as the market attempts to understand the voting patterns of different new MPC members.

I can reiterate the Finance Secretary’s comment yesterday that the Government and the Reserve Bank have reached a broad consensus on what such a committee should look like and what the powers of the Governor might be. While the details have to be ironed out, there are no differences between the Government and the Reserve Bank in this matter.