 "New monetary policy framework to give more autonomy to RBI")
According to the new framework, a part of which came into effect on February 28, the target for retail inflation which is the nominal anchor, is set at six per cent by January 2016. The target for 2016-17 and all the subsequent years will be four per cent with a band of plus/minus two per cent.
“I have always held a view that price stability is the dominant objective of the monetary policy. The framework reiterates that. Of course, controlling inflation requires cooperation from many areas. Nevertheless, monetary authority has a major role to play,” said C Rangarajan, former chairman of the Prime Minister’s Economic Advisory Council, who also served as RBI governor from 1992 to 1997.
“The agreement between the RBI and the finance ministry clearly says, once inflation reach es beyond the comfort zone, both at high and low levels, RBI should use whatever in its command to bring it to the comfort zone. That way, it gives autonomy to RBI,” Rangarajan added.
The new monetary policy framework was formed following the recommendations of a committee headed by RBI Deputy Governor Urjit Patel. Apart from inflation targeting as its prime objective, the committee suggested the formation of a five-member monetary policy committee (MPC) headed by the RBI governor. Out of the five members, three were suggested to be from RBI (the deputy governor and the executive director in-charge of monetary policy).
“We are yet to see the formulation of the MPC. It is recognised the world over that there should be consultation between the finance ministry and the central bank, but the central bank should have autonomy on the monetary policy, though it may consult outside experts,” said a former central banker, who did not wish to be named.
“It (the monetary policy framework) establishes an inflation target. That is a good thing. Oddly enough, there is no monetary policy committee. The interest rate is decided by one person — the RBI governor. This will lead to many infirmities. But this is progress for the period until IFC (Indian Financial Code) is enacted,” said Ajay Shah, professor, National Institute of Public Finance and Policy, and a member of the Financial Sector Legislative Reforms Commission.
Finance Minister Arun Jaitley said in his Budget speech the government would move to amend the RBI Act this year to provide for a MPC.
Before amending the Act, there needs to be agreement between the government and the central bank about the composition of the committee.
The previous United Progressive Alliance government was not comfortable with the idea of the committee having most members from RBI on the ground that it would not take an independent view. There were also proposals to increase the number of members.
Another issue of contention was the Patel committee suggestion that the two external members be selected by the chairman of the committee (the RBI governor) and vice-chairman (RBI deputy governor). There was another view that since the government appoints the RBI governor and deputy governor, it should also appoint the committee members.
This theory was, however, challenged on the ground that if the government appoints committee members — who would be bureaucrats — then the members’ view would be similar to the government’s.
Experts have suggested members be professionals and not part of the government. “It is still not clear whether there is a meeting of minds between the government and RBI on how the MPC will be constituted. The entire process may take at least six months to get completed,” said A Prasanna, chief economist, ICICI Securities Primary Dealership. He said the amendment could be introduced in the next session of Parliament; even if it is passed in both Houses, it would take about six months.
“India has paid a big price in the past for not having clarity on monetary policy objectives. This is a step in the right direction. Now that the government has given RBI a target for inflation and there will be a committee to take decisions, ideally, all stakeholders should believe that the committee will objectively do its job. As such, there should be less external pressure on RBI to pursue a particular course of policy,” Prasanna added.