By Ruma Dubey
The Reserve Bank of India and India’s monetary policy making process is on the threshold of a huge transformation. We finally have in place something like the US FOMC and Bank of England. While countries in the West are vesting more and more power in the hands of the central banks, India is moving towards reducing this.
Come 4th October and there is a strong rumour doing the rounds that we could have the Monetary Policy Committee (MPC) which will announce the policy, making inflation its central target. This still means that Urjit Patel will announce the policy; just like Yellen or Draghi does.
Monetary policy decision-making is vested with a MPC, a six-member committee of which three are nominated by the Govt and three from the RBI, wherein RBI Governor will be the Chairman , Deputy Governor in-charge of monetary policy could be the Vice-Chairman. The term of office of the MPC could be four years, without prospect of renewal. Like the US Federal Reserve, minutes of this MPC meet will be released at a later date, two weeks after the meet.
The Govt yesterday announced its three members - Chetan Ghate, professor at Indian Statistical Institute; Pami Dua, director at Delhi School of Economics; and Ravindra Dholakia, professor at Indian Institute of Management, Ahmedabad.
The three members of RBI are - RBI governor Urjit Patel, deputy governor R. Gandhi, who is in charge of the monetary policy, and executive director Michael Patra.
This is just like what the Bank of England has and Fed Reserve’s FOMC meet. The committee is held directly accountable when set targets for inflation are not achieved and the MPC has to issue a statement explaining why the target was not met. It will also have to propose plans to correct and set roadmaps, giving definitive timelines. This MPC really puts RBI on the mat and people will be able to assess the progress and efficacy of the measures taken.
Currently, the US FOMC comprises of a 12-member panel of which 10 have the voting right to decide the Fed’s interest rate decisions. Of this 12, seven are appointed by the President and five are heads of regional central banks. On the other hand, Bank of England has 9 members, which includes the Governor and three deputy Governors. The Chancellor appoints four members and one last member is the chief economist of Bank of England.
Currently, at least till now, the RBI Governor enjoyed the ultimate power when it came to taking decisions on interest rates. He got his inputs from the Monetary Policy Department and Technical Advisory Committee. This MPC will be more like the Technical Advisory Committee and this ensures a smooth transition from the existing system to that of MPC.
The FOMC takes two days to come to a decision and the MPC will take three days. The internal MPC members will put in their points and the RBI Governor will need to respond and if there is a difference of opinion, try to persuade the others to see his point of view. The external members will also be part of these discussions though they work part-time and bring with them, the learned “outside” view thus giving the decision making process a very balanced outlook.
The best part is that the 6 members will vote for the decision and this will be in the public domain for us to see as to who supports and who dissents, opening up the discussion in the public domain. Even the minutes of the MPC meet will be uploaded on the website, giving this entire process a transparent and above-board perspective.
The MPC’s main main focus will be inflation and not growth. Also it is very apparent that RBI and not the Govt will set the inflation targets. This would mean RBI could function as a completely independent body, with least interference from the Govt. Now, this is something which we need to see if the Govt will allow. The perception on the street is that the 80 –year old institution was as such doing very well, earning praises from the IMF, which said in 2013 that “the regulatory and supervisory regime for banks, insurance, and securities markets in India is well developed and largely in compliance with international standards.” So the question is why this MPC; just to ape the West?
The members appointed by the Govt are experts and one hopes that they will not end up being spokespersons for the Govt, acting on behalf of the Govt. The decision of the MPC will be binding and the Governor cannot override this, except cast a vote when there is a tie. The Governor has no veto power. Isn't this is a clear dilution of the power of the Governor?
For now, even as these questions dog the mind, the fact remains that a change has been ushered in; let’s give change a chance and see if this works. Not that the RBI needed any tampering in the first place!