MPC over one individual

The Monetary Policy Committee (MPC) is expected to be in place before the next monetary policy review by the RBI in August. In this regard, the government has put into effect the relevant amendments in the Reserve Bank of India (RBI) Act from Monday. Come what may, the government will not allow current RBI Governor Raghuram Rajan to finish his tenure with the independence he once had.  

The MPC’s sole task will be to target inflation. Until this year, the short-term lending rate was decided solely by the governor in consultation with a technical advisory panel within the RBI.  The new MPC will include three members from the RBI—the governor, deputy governor and another central bank nominee. The other three members will be appointed by the Centre based on the recommendations of a panel headed by the cabinet secretary and will be experts in the field of economics, banking, finance or monetary policy. 

It will meet at least four times a year and will publicise its decisions after each meeting. Unlike the previous arrangement, the RBI governor will not have veto powers. But he will have a casting vote in the event of a tie. In the past, the Centre, under both the current NDA and previous UPA dispensation, and the Central bank have been at loggerheads over the desired monetary policy outcome.

 As an impeccable institution, with a proven track record, the RBI has formulated the nation’s monetary policy, keeping in the mind the long-term implications its decision will have on the economy, regardless of the government’s whims and fancies.

 As per the RBI Act of 1934, all 21 members of the central board of directors, including the Governor himself, are appointed by the Government of India. One interpretation of the existing law clearly stipulates that the government can dictate policy to the Central bank, which the RBI Governor will be obliged to follow. 

Therefore, any apparent independence that the RBI may enjoy is clearly dependent on how its Governor responds to political pressure. Under Rajan, the RBI has admittedly shown a great deal of independence from political and corporate pressures.  However, certain experts have argued that such a model where the RBI governor is the sole arbitrator of a nation’s monetary policy would not leave the institution in good health. 

What if the next governor did not possess Rajan’s courage of conviction? As the sole arbitrator of monetary policy, such a governor would constantly be under pressure to toe the government’s line at the expense of public interest. It would be presumptuous to believe that all the three government-appointed members will be the lackeys of the government. The case in point, ironically, is current RBI Governor Raghuram Rajan, who is, for all intents and purposes, someone appointed by the government. 

Under the revised MPC, the RBI Governor will have to consult the committee before a final decision is taken on lending rates, leaving the institution in a better shape. This is something Rajan has publicly supported. While delivering the foundation day lecture at the Tata Institute of Fundamental Research here, Rajan called for institutionalising the yet-to-be constituted MPC so that "we build the institutions necessary to secure a low inflation future, especially because we seem to be making headway". 

Describing the MPC as a truly revolutionary step, he said we got used to decades of moderate to high inflation, leading to industrialists and governments paying negative real interest rates and the burden of the hidden inflation tax falling on the middle-class saver and the poor. "With the MPC, which is truly revolutionary, we are abandoning the ways of the past that benefited the few at the expense of the many. 

As we move towards embedding institutions that result in sustained low inflation and positive real interest rates, this requires all constituencies to make adjustments" he said. One now hopes that his successor and the new MPC will "stay the course" to ensure a low-inflation future, especially for India’s poor.