A peek in

Transparency is an essential feature for any public agency in a democracy. The central monetary authority is no exception. This is why Reserve Bank Governor Duvvuri Subbarao must be congratulated on publishing the minutes of the discussion that took place before the RBI released its latest credit policy. This is a welcome step, as the RBI needed to move ahead both on defining clearly the objective of monetary policy, and making the decision-making process by the monetary policy committee open and transparent. The RBI has traditionally been a laggard in terms of transparency; two recent academic surveys found that, while Asian central banks as a whole had been improving their position in terms of openness, the RBI’s performance on this score had stagnated — and, according to one of them, actually worsened between 1998 and 2006. This must not be allowed to continue. The RBI needs to set itself a goal. One that is both tangible and desirable: to achieve the median transparency score among G-20 nations. It should rank at least 10th out of the 20 members.  Full reform of the RBI involves independence, transparency, accountability and inflation-targeting. While at the present time attempting this is difficult, certain improvements of the monetary policy process can now be undertaken. Consider one key element of the process, the executive monetary policy committee or MPC. This committee, through voting, makes decisions that set the interest rate. In the UK, the MPC comprises the governor, three deputy governors, and three economists appointed by the Treasury. (The finance secretary would participate in the discussions but not vote.) This same structure appears to be quite appropriate for India. In such a structure, the committee would sit every month, following a pre-announced schedule. The bank’s research department would make presentations to the MPC about what is taking place in the economy. The MPC would then vote, and interest rates would be hiked or lowered. Each MPC member would write down a 1000-word rationale statement of why she voted how she did; and in a fortnight, full information — how each member voted, as well her written rationale — would be placed on the bank website. The markets would be assured that interest rate changes would almost never take place other than on these dates. The RBI has taken one step forward. It must go still further