The Monetary Policy Framework Agreement signed by the Centre and the Reserve Bank of India a month ago has run into its first hurdle over the constitution of the Monetary Policy Committee (MPC). The RBI may have dismissed talk of disagreement with the Centre as “speculative chatter”
, but it is clear that both parties are trying to gain control over the MPC, which will be the key body to determine interest rates in the country. The RBI would like the MPC to be fashioned in line with the recommendations of the Urjit Patel Committee, which went into monetary policy framework reform. This committee recommended a five-member MPC with the RBI governor as chairman, the deputy governor in charge of monetary policy as vice-chairman, the executive director and two external members to be picked by the chairman and vice-chairman. The members would have a vote each and there would be no veto power for the chairman.
The Centre, however, prefers the recommendations of the Financial Sector Legislative Reforms Commission (FSLRC) which proposed a seven-member panel made up of the RBI governor, an executive member of the RBI board, three external members to be picked by the government, and two external members to be appointed by the government in consultation with the RBI. The government representative would be a non-voting attendee. While the RBI governor would be empowered with the power of veto, the exercise of this would need to be accompanied by a public statement explaining the reasons for the decision.
Neither recommendation is ideal, but of the two, the FSLRC version is at least invested with a degree of balance. While the composition of the committee may not be weighted in favour of the RBI, vesting the governor with the veto power is a guard against the erosion of the central bank’s institutional autonomy and undue pressure from the government. The RBI’s version of the MPC, on the other hand, is a non-starter as it is stacked with its own representatives and none from the government. What we need, therefore, is the proverbial golden mean: a committee that will strike the right balance between the government and the RBI representatives/nominees, with the veto resting with the governor. This power is important because at the end of the day it is the RBI that bears responsibility for inflation targeting. Under the monetary policy framework agreement, the governor has to explain to the government if he’s unable to meet the inflation target. The RBI aims to bring inflation down to 6 per cent by January 2016 and to 4 per cent in subsequent years. Tweaking the FSLRC version to provide a greater balance could ensure that the government voice is heard even as the RBI’s independence is not compromised.
