From Governor To Committee: What India Can Learn From Other Central Banks On Its New Set-Up

Here’s a guide to some examples of how policy-decision panels operate around the world...

26/09/2016 2:54 PM IST | Updated 26/09/2016 3:13 PM IST
Danish Siddiqui / Reuters

Welcome to the club. India is joining a group of countries that rely on collective wisdom to conduct monetary policy, taking the weight of responsibility off the sole shoulders of the governor.

Former chief Raghuram Rajan, who spearheaded the shift, said last month that India's six-member monetary policy committee will bring a balance of views, continuity and more independence to the 81-year-old central bank. With the vote-structure known and members now finalized, investors will look for clues on vibrancy and openness in the discussions, which may impact borrowing costs and market volatility in the $2 trillion economy.

"You need to have people voicing their independent views otherwise if everyone does what the governor is doing, you're not any different from the current set-up," said Sonal Varma, an economist at Nomura Holdings Inc. in Singapore. "The only thing is whether people will be OK to be seen as dissenting against the governor."

It's unclear if the new set-up will be in place for India's next interest-rate review, on Oct. 4, because rules stipulate that the central bank must publish a calendar of meetings at least a week before the first one. From the Bank of England to the U.S. Federal Reserve, here's a guide to some examples of how policy-decision panels operate around the world:

Bank of England: The Debating Club

The U.K.'s MPC holds three meetings over the course of a week, where the first is dedicated to interpreting economic indicators, the second to debating an appropriate monetary stance, and the third where members vote on a decision proposed by the governor.

So divergent can opinions get that former Governor Mervyn King was outvoted several times during his 10-year term that ended in 2013. A government official is allowed to sit in on the meetings, but can't vote.

India's MPC has six members. Three of these are from the central bank -- including the governor -- and three are academics, who were appointed last week by the government. The law rules out bureaucrats or lawmakers Each of the six has a vote and the governor holds an additional tie-breaker. However, he won't be able to veto a majority decision in case of dissent

Australia: Dissent, What Dissent?

Most of the Reserve Bank of Australia's independent directors come from the business world, so the diversity of the board must make for some lively debates. Unfortunately, the broader public doesn't get the whole story as the minutes don't attribute arguments.

Former Governor Glenn Stevens, whose decade-long term ended Sept. 18, had indicated decisions were made by consensus. Only he and his deputy spoke in public on monetary policy -- and even that was limited.

India's MPC will hold at least four meetings a year and the minutes -- published two weeks later -- will disclose how each member voted and why However, it isn't yet clear whether members of India's MPC will be gagged. New Governor Urjit Patel's own reticence to speak in public in his three-and-a-half years as deputy governor could set the tone for the MPC

The U.S.: Free For All

There's no such restraint in the U.S., where some observers complain too much communication is muddying the outlook.

Opinions however don't necessarily show in votes -- the three dissenting votes against a majority of seven last week were the most opposition expressed at a single meeting since December 2014. Still, there's a consensus that "too many people are speaking and that communication must be streamlined," said Thomas Costerg, a New York-based senior economist at Standard Chartered Plc.

The code of conduct for members of India's MPC will be decided by the central bank's board

Bank of Japan: Kuroda's Long Shadow

Governor Haruhiko Kuroda and his board members make frequent speeches around Japan and a summary of their policy-decision discussions is followed by more detailed minutes weeks later. All this communication has done little, though, in helping economists and investors to forecast the outcomes of the BOJ's policy meetings.

Since taking the helm in 2013, Kuroda has gained a reputation for surprising observers, which initially helped him maximize the market impact of policy changes. That tactic hasn't worked this year, starting from the decision in January to adopt a negative interest rate that was perceived as a communications disaster. With the BOJ's inflation target nowhere in sight, the Sept. 21 switch from shock-and-awe monetary stimulus to fine tuning of the yield curve proved to be another surprise.

India's MPC will be mandated to keep the inflation rate at 4 percent, while allowing it to fluctuate between 2 percent and 6 percent Moreover, the external members hold a fixed four-year term, overlapping with the inflation target that will be reviewed only in 2021

European Central Bank: Herding Cats

The ECB's Governing Council strives to reach its decisions by consensus, and with 25 policy makers -- central bank chiefs from the 19 euro-area countries and six Executive Board members -- that's not easy.

Personalities also play a key role. President Mario Draghi is a "great tactician, very political, who manages to muster a majority every time," said Frederik Ducrozet, an economist at Pictet & Cie in Geneva. Such is his clout that he sometimes made commitments first -- including the "whatever it takes" to save the euro speech in 2012 -- while worrying about garnering support later.

A summary released about four weeks after each meeting describes the debate in broad strokes without names. Dissenting governors who wish their position to be known have to say so in public -- and some have.

"One should not minimize the possibility that as the institution gets created, the necessary independence of views emerges," India's Rajan had said of the nation's proposed MPC. "People will be equals on the committee, and I think the committee will take a life of its own."

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