Both finance minister Arun Jaitley as well as RBI Governor Raghuram Rajan have done well to contain the controversy created by amendments to the RBI Act proposed by the Finance Bill. Innocuous sounding changes to Sections 45 U and W of the RBI Act make it difficult for the central bank to conduct repo and reverse repo operations, critical for ensuring appropriate liquidity in the system—that is the only way the central bank can ensure the overnight rate is as close to the repo as possible. When analysts figured out the import of the Finance Act changes and brought it to Rajan’s notice, he simply said since the move didn’t find mention in the finance minister’s Budget speech—where all significant policy statements find mention—he was confident the government would not be implementing the changes. And when Jaitley was quizzed about this, he simply said that the matter would be discussed in Parliament, suggesting it would be fixed by way of an amendment to the Finance Bill. Given it could not possibly have been the government’s intention to stymie the RBI’s functioning, it is apparent the changes were not fully thought through and will be fixed now.
The other area where there is some disquiet that needs addressing relates to the formation of the monetary policy committee (MPC) which is part of the agreement between the government and RBI on inflation-targeting. While this newspaper has argued against inflation targeting given that it leads to a permanently higher level of interest rates—primarily because items like food which comprise the lion’s share of CPI do not respond to monetary policy—it is important to preserve the primacy of the central bank. More so since, after inflation-targeting is now a formal policy, the central bank will be held accountable for keeping inflation under check. There is, at present, a tussle on what model of the MPC is to be adopted. Under the one proposed by the Urjit Patel committee—Patel is RBI Deputy Governor—the MPC would comprise 5 members, all of whom would either be from RBI or nominated by RBI. The RBI Governor, Deputy Governor and ED in charge of monetary policy would be members and the other two would be chosen by the first two; apart from this, the RBI Governor would have the casting vote in case one member is absent. In the MPC proposed by the FSLRC, there would be 2 RBI members and 5 external ones. Of the external ones, 2 would be appointed in consultation with RBI and 3 others solely by the government. While the RBI Governor would have the power of veto in the FSLRC model, this would be under extreme circumstances and would have to be accompanied by a written explanation. In other words, the FSLRC model of the MPC has the balance of advantage with the government, which is not a happy situation since the idea is to have an independent central bank, not one which is a rubber stamp for the government. Since the public perception of the central bank’s independence is an important component of how market players view the bank, the government would do well to accept the Urjit Patel formulation.