Important to ensure RBI’s independence in MPC
Though single-minded inflation-targeting, without reference to other variables such as a stagnating economy, is a bad idea, if done right, there is a lot to be said in favour of the monetary policy framework that the government plans to put in place by the end of the year. Since it is the government that will give the central bank the inflation target, it could specify that RBI also keep in mind GDP growth while pursuing inflation control, a multiple-indicator model that worked well when the government’s policies were not as populist as they were over the last few years. It is important, though, to ensure the monetary policy committee (MPC) is truly independent, and its members are not appointed by the government, else the central bank’s independence will get compromised. Indeed, the whole idea behind central bank independence is that while the political class tends to have a short-term agenda, the central bank has a longer-term horizon; and, unlike the government, RBI has a dedicated team of professional economists. In the MPC proposed by the Urjit Patel committee, of the 5 members, 3 are to be RBI staffers—the Governor, the Deputy Governor and executive director in charge of monetary policy—and the other two will be nominated by RBI Governor and Deputy Governor. All decisions will be taken by majority, the votes will be made public within two weeks of the meeting along with the minutes of what was discussed; in other words, there will be welcome transparency and markets will be better able to read RBI’s mind much as they do the US Fed’s after the minutes of various FOMC meetings are made public.
Other aspects of the MPC framework are even more important. The RBI Governor, under this new framework, will be testifying before Parliament or a select committee regularly. So, if a 6% inflation target is set, and the government goes and increases minimum support prices by a very large amount or runs up a very large deficit, the Governor will be expected to tell Parliament that he/she cannot meet his/her targets as long as the government behaves in the way it does. That is, the MPC framework will force a lot more transparency and will give the central bank a chance to make its case in a more formal manner. The MPC, in this model, is expected to have a dedicated secretariat whose job will be to create structured presentations—which will be made public and therefore debated—on why various options are being chosen, or rejected. So, for instance, the MPC secretariat will have to take a view, and publicly, on the arguments made in this newspaper on the predominant role of minimum support prices in determining inflation—in other words, a significant scaling up of RBI’s monetary policy department will probably be called for. Similarly, if RBI fails to meet its targets, it will have to give a written explanation as to why it failed and what actions are proposed to remedy the situation and in what time frame this will take place. A good blend of transparency and accountability—RBI independence, however, is central to the framework.