Let committee, not governor, take monetary decisions: Subbarao

RBI Governor D Subbarao on Monday proposed that all monetary policy decisions be taken by a committee of the central bank — as is the practice in the US and UK.  The Federal Open Market Committee of the US Fed and the Monetary Policy Committee (MPC) of the Bank of England decide on actions by a majority vote.  In India, the final call is the RBI governor’s. The governor does hold structured consultations with the four deputy governors with whom he constitutes an informal monetary policy committee, but there is no voting, and the final decision is the governor’s.  “My own view is that we should be moving towards an MPC (monetary policy committee) system, but in a phased manner. There are some preconditions to be met,” Subbarao said at the meeting of the Central Bank Governance Group in Basel today.  “We do have a Technical Advisory Committee (TAC) on Monetary Policy that acts as a proxy policy committee, but it is advisory in nature. It comprises the governor as chairman, the deputy governor in charge of monetary policy as vice chairman and other three DGs as members,” Subbarao said. The committee also has five external members — two experts from the Central Board of the Bank, and three drawn from a wider pool — nominated by the governor. “They give specific recommendations on policy options and these are minuted,” Subbarao said. Listing conditions for the MPC system, he said the central bank should be given legally-backed formal autonomy. “Second, in a situation where inflation dynamics are more often dictated by supply side elements, the central bank’s ability to control inflation is restricted. An MPC mechanism in such a situation can weaken the coordination between the government and the Reserve Bank. However, when our financial markets deepen further, operating procedures improve and monetary transmission becomes more efficient, shifting to an MPC system becomes a realistic option,” he said.  Close to the policy decision, an established practice for the governor is to meet the prime minister and finance minister informally, give them an assessment of the macroeconomic situation, and indicate to them the proposed policy stance. “This is only a matter of courtesy, and the process has not impinged on the autonomy of the Reserve Bank in monetary policy making,” Subbarao said. The consultation with the finance minister, in particular, should be seen as an avenue for fiscal-monetary coordination, since on a reciprocal basis, the finance minister too takes the governor into confidence on the fiscal stance ahead of presenting the budget to Parliament, he said. “The RBI in effect functions with a functionally autonomous mandate and there has been no instance so far of the government exercising its reserve powers to issue a directive. This is all the more remarkable since the interaction between the government and the Reserve Bank is closer and more frequent than is typical in other countries, and this draws from the key role of the RBI in financial sector reforms and economic development...” Systems of accountability are tight, he said. “Since we are not an inflation targeting central bank, there is no formal memorandum of understanding or a ‘results agreement’ between the government and the Reserve Bank. Nevertheless, we render accountability for our performance on inflation. We explain the rationale for our monetary policy stance quite extensively,” Subbarao said.