Given the recent history of acrimony between the government and the central bank on the setting of interest rates, it is natural to dismiss the recommendations of the Financial Sector Legislative Reforms Commission (FSLRC) as yet another attempt by the government to muscle in on what is legitimately RBI’s domain. More so since, apart from what FSLRC has said about the possible merging of the banking regulation part of the central bank after five years with the super regulator, which is supposed to subsume existing regulators like Sebi, Irda, PFRDA, FMC, etc, it seeks to give the government more powers in shaping monetary policy. Indeed, while the objectives of monetary policy are somewhat flexible right now—at different times, it can be controlling inflation and promoting investment—the FSLRC is of the view the predominant objectives of monetary policy will be decided in consultation with the central government. Indeed, the danger of this approach is that the central bank could then be targeting just a single variable—inflation—which is something that hasn’t worked too well globally either.
Under the model proposed, the RBI Governor will no longer be the sole deciding authority on whether rates are to be changed—there is a technical advisory committee even today, but its views are not binding. There is, instead, to be a monetary policy committee (MPC) which will be chaired by the RBI Governor and will have one executive member. In addition, it will have five external members—two will be appointed by the central government in consultation with the Governor and three solely by the government. In other words, when policies are put to vote, the committee has been designed to ensure the government carries the day.
It needn’t, however, necessarily be that way and it is worth keeping in mind an MPC is the way monetary policy is conducted in the US and the UK. The difference, and the suspicion, lies in the way the members of the Indian MPC are selected. Since the MPC in itself is a good idea as it brings a greater number of experts on board, it is important to ensure the baby doesn’t get thrown out with the bathwater. Ways have to be found to ensure the selection process is more independent and transparent, perhaps the number of persons to be appointed solely by the government can be reduced—let’s not forget regulators like the Chief Election Commissioner who have fixed tenures have tended to do a decent job. The onus of making it work lies with the government.