RBI Gov Might Lose Veto Over Repo Rate. More Stable Property Market For Home Buyers Ahead?

In much of the developed West, central banks are independent, and inflation levels are, by historical standards, very low. But, this is not true of India. In major central banks across the world, decisions are taken by a monetary policy committee. This, too, is not true of India. But, there has been competing proposals to institute a monetary policy committee in the recent past.

On 23rd July 2015, the government issued a revised draft of the Indian Financial Code (IFC). The revised draft of the IFC proposed that a monetary policy committee headed by the RBI 'chairperson' should decide the key interest rates according to a majority vote. This is a proposal to strip the RBI governor of the veto power to decide the key interest rates. This would give more power to the central government in deciding the interest rates. 

Needless to mention, the RBI and the Central Bank governor would oppose this move on the grounds that this would undermine the independence of the RBI. But, independence is a much broader concept. Instrument independence and goal independence are two different things. When the central bank has goal independence, the central bank can decide the goals of the monetary policy. When the central bank merely has instrument independence, the central bank is free to choose the instruments to achieve the goals the government or the monetary policy sets for it. 

For instance, earlier the FSLRC report had suggested that the central government can specify the publicly stated quantifiable objective of the monetary policy. Though this will dilute the goal independence of the RBI, it will make the RBI more accountable to the government and the public. Such accountability was precisely what garnered great public support in favour of the instrumental independence of the Reserve Bank of New Zealand.

Economists like Ajay Shah, who was part of the Financial Sector Legislative Reforms Commission (FSLRC), have long argued that for the RBI to function efficiently, there should be loops of feedback. When this is so, inflation levels would be lower, as in countries where there is a monetary policy committee and central bank independence.

What does this mean for home buyers? Home buyers would find the price of real estate in India more stable because there would be greater price stability. If you buy an under-construction flat in India, the price of raw materials would not go up unpredictably. The real interest rates, in the long run, have much to do with the price stability because when the inflation rates are higher, the real interest rates would go up. Even though the RBI might hike the repo rate to maintain price stability, this would keep the real interest rates low.

Moreover, when the repo rate is high, this would lead to more saving and less spending in the real estate markets, though the cost of borrowing would be high. Even though home loan interest rates would be high, this would lower home prices in the long run. Cement and steel are internationally traded commodities. When there is price stability, their price in Indian Rupee would be stable too. In short, an independent, accountable central bank would lead to greater stability in residential property markets.