This newspaper differed with the central bank when it plumped in favour of inflation-targeting, and argued that stimulating growth was also a vital RBI objective. Matters got worse when RBI opted for CPI-based inflation-targeting since CPI is heavily influenced by food which is driven by both short-term and supply-side issues that interest rates cannot control. Yet, it was always understood that rate-fixing was an RBI prerogative since that is where the specialists were, it could not be seconded to the finance ministry where, often enough, political considerations come into play. It was in this context that there was a level of comfort with the Urjit Patel Commitee which suggested a 5-member monetary policy committee (MPC) with 3 members from RBI—the Governor, the Deputy Governor and Executive Director in charge of monetary policy—and 2 external candidates nominated by the central bank; and in case one member was absent, the Governor was to have the casting vote.
Things began to look worrying when the FSLRC recommended a 7-member MPC with just 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 a veto in the FSLRC model, this would be under extreme circumstances and would have to be accompanied by a written explanation. The draft Indian Financial Code (IFC) takes this process of marginalising RBI even further. The RBI Governor no longer has a veto power, and just 3 of the 7 members will be from the central bank—the other 4 will be nominated by the central government. Giving the Governor a casting vote in case there is a tie sounds a great deal, but with the majority of MPC members nominated by the government, this amounts to little. If RBI is mandated with the task of targeting inflation, it must have the freedom to use all tools at its disposal in the manner it feels best. While it is important RBI hear more voices on inflation, interest rates and economic growth, the central bank cannot be hemmed in by being compelled to accept views it may not agree with.
Many will argue the model resembles that of the US Fed where the chairman also does not have a veto power. The problem with this comparison, however, lies in the manner in which the other members on the committee are selected. In the US, there is a process of confirmation by the legislature, it is not as simple as the government of the day just nominating someone. Two, with very long tenure, the members on the committee tend to have a different approach as compared to people who are appointed for short durations—India’s history with political appointees on various boards, including those of banks, has in any case been an unhappy one. In the UK, similarly, the majority on the monetary policy committee are appointees of the Bank of England. A diminished role for the central bank, one of the few institutions whose credibility has not been tarnished, serves no one’s interests.