The objective of monetary policy, as defined in the revised Indian Financial Code dated 23 July 2015, is to achieve price stability while striking a balance with the objective of the Central Government to achieve growth.
Until as recently as 2013 inflation in India ran into double digits. While targeting inflation has always been a priority, the alarming rates of 2013 brought the issue into critical focus. The RBI governor Dr Raghuram Rajan has been consistent in his view that inflation has to be subdued for India to achieve sustainable long-term growth.
Against this background, the Finance Minister in his 2015 Budget Speech announced:
"To ensure that our victory over inflation is institutionalized, we have concluded a Monetary Policy Framework Agreement with the RBI, as I had promised in my Budget Speech for 2014-15. This Framework clearly states the objective of keeping inflation below 6%. We will move to amend the RBI Act this year, to provide for a Monetary Policy Committee."
Back In 2013, Urjit Patel Committee had looked into the composition of Monetary Policy Committee (MPC) with the governor of the RBI as the chairperson, the deputy governor in charge of monetary policy as vice chairperson, and the executive director in charge of monetary policy as a member. Two other external members were to be decided by the chairperson and vice chairperson on the basis of demonstrated expertise and experience in monetary economics, macroeconomics, central banking, financial markets, public finance and related areas. The chairperson, or in his absence the vice chairperson, shall exercise a casting vote in situations arising on account of unforeseen exigencies necessitating the absence of a member for the MPC meeting in which voting is equally divided.
However, the present proposal of July 2015 envisages a seven-member committee - three from the Reserve Bank of India and four appointed by the Central Government. This effectively means that the Central Government will have the final say rather than the RBI in the administration of monetary policy and decision on interest rate. Since an elected Government is susceptible to public pressure and may sometime be under compulsion to play to the gallery, such an arrangement is fraught with risks both in the areas of appointment of members and their objectivity in the decision-making process.
Functional autonomy is a key pillar of institutional strength. RBI has been doing well in its role towards containing inflation and promoting growth through various monetary measures, the domain of any Central Bank. While there is a need for a committee approach to decision making, it is better to adopt the Urjit Patel Committee recommendations rather than as proposed in revised IFC, particularly at this crucial juncture, when India is poised towards a double digit growth and the RBI has a governor who is the toast of the global financial community.