By Ruma Dubey
Let’s face the truth – we appoint a new RBI Governor, apart from us Indians, that too a small section, no one really cares. But a new Federal Reserve chief is announced; the whole world will sit up and take notice. He/she is undoubtedly the most powerful economic public figure on earth and the appointment of this chief can move the markets while the “tone” of his/her language is analysed and dissected to the bare bones by economists.
Thus the nomination of the new Fed Governor, Jerome Powell was met with a cheer as he was touted to be the “continuity candidate.” He has neither diverged from Yellen in any significant way since the time he joined the Board nor has he ever dissented from Fed’s decision. But many say, when it comes to monetary policy, compared to his academic economist predecessors, he is not a specialist and that could be the unchartered territory or uncertainty which no one has factored for. He is said to be a stickler for regulations and during his time, we could see simpler but tighter banking regulations come in.
This brings to mind one big question – how different are the appointment processes of the RBI and Fed Governors? It is like comparing apples and oranges.
In India, we can say without a doubt that the appointment of the RBI Governor is completely political. The Prime Minister’s Office (PMO) chooses the governor after consulting the finance ministry and the outgoing governor; though there is a formally designated vehicle - Appointments Committee to shortlist the candidates, we all know that it is the PM who decides. We now have the Monetary Policy Committee (MPC), which comprises of 6 members – three officials of the RBI and three external members nominated by the Government.
In the USA too, it is the country head, the President who nominates the names for chair and vice-chair from among the sitting Governors for four-year terms; these appointments are also subject to Senate confirmation. The Federal Reserve System is supervised by the Board of Governors, consisting of seven members appointed by the President of the United States and confirmed by the U.S. Senate.
At the Fed’s Board, all the seven members have equal rights;’ Yellen is just the face of the Board and she has rights equal to the six, nothing more and nothing less. On the other hand in India, decisions are taken by majority with the Governor having the casting vote in case of a tie. But in both cases, be it MPC or Fed, the Governor, being the face of the most powerful fiscal body of the world, wields tremendous power and through persuasive powers, can get his/her decision to be voted unanimously.
Both the Fed and RBI have the same objective – maintain stability and liquidity in the economy, regulate the banking system, directing monetary policy, keep a close watch on inflation and both set the interest rates in the system. The Fed has the additional task of keeping a close watch on unemployment numbers; in India the official unemployment numbers do not yet come in but even when they do, it is unlikely that RBI will have any role to play.
The Fed Chairman serves a term of four years while RBI Governor is shorter at 3 years.
The debate always rages on – are these central banks as autonomous as they are made out to be? The truth is that political interference is persistent and inevitable but it all depends on how strong-willed the Governor is – if he/she prefers to toe the line, then the most powerful public figure ends up being a mere rubber stamp, diluting the entire relevance of this central bank.
We have seen and experienced Patel, let us see how Powell shapes up – a stooge or an independent eagle?