A new era in monetary policy formulation is set to start with the Union Finance Ministry releasing the revised draft of the Indian Financial Code (IFC). It provides for the setting up of a Monetary Policy Committee (MPC) to debate on monetary affairs and decide the policy rate. This move is in line with practices in many of the developing countries where the central banks have pursued the committee approach to address monetary policy issues. Currently, the Reserve Bank of India (RBI), the monetary policy regulator, goes by the views of a Technical Advisory Committee (TAC) on such issues. The TAC comprises officials from the RBI besides a few external experts. It advises the central banker on the monetary policy stance based on macro-economic and monetary developments. However, the RBI Governor has the last word, and the right to veto any decision of the TAC. The draft IFC, submitted by the Financial Sector Legislative Reforms Commission (FSLRC) headed by former Supreme Court judge B.N. Srikrishna, has suggested that the MPC members be appointed after due consultations between the government and the RBI. It has also recommended that the government have three nominees in the seven-member MPC. The FSLRC, however, has recommended veto power for the RBI Governor. The revised draft circulated for public discussion by the Finance Ministry, however, seeks to vest in the government the power to nominate four members to the MPC. It proposes that no veto power be given to the Governor, and that at best he be allowed a casting vote to use in the event of a tie.
In the context of the continuing uneasy relationship between the fiscal and monetary bosses and in light of the changing dynamics of the domestic economy owing to assorted factors falling outside policy controls, the importance of a cohesive action plan should not be underestimated. Given this, it is not incorrect to allow the government a say in matters of monetary policy. The revised draft, however, seems to be trying to push too much of government into monetary matters. Seen in tandem with its earlier bid to remove from the RBI the public debt management function, this move only appears intended to undermine the RBI’s autonomy, which had actually succeeded in insuring the Indian economy against the profligate policies of successive governments, and the financial shenanigans in other economies. If the government is to have majority control in the MPC, what is the point of giving the RBI Governor the right to a casting vote? Fiscal bosses have fixed tenures, unlike institutions such as the RBI that are not subject to electoral cycles. Prudence suggests that RBI and like institutions must be allowed to function independently.