What would Alan Blinder say on RBI’s TAC design?

Though RBI does not have a MPC as of now it has a Technical Advisory Committee (TAC).

RBI Governor explains TAC structure in this speech :

There is no formal committee structure like the FOMC of the Fed or the Monetary Policy Committee (MPC) of the Bank of England. The Governor holds structured consultations with the four Deputy Governors and they constitute an informal MPC although a committee structure is not enjoined under the law or the rules. By its very nature there is no voting in this committee and the final call is that of the Governor.

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 the vice chairman and other three Deputy Governors as members. Besides, the committee has five external members, two of whom are experts from the Central Board of the Bank while the other three are drawn from a wider pool. The external members are nominated by the Governor. They give specific recommendations on policy options and these are minuted. We have recently started putting the minutes of the meeting in the public domain, including specific recommendations, without directly identifying members with their advice. 

He adds MPC should follow:

An issue that comes up often is that even as the current system is working, whether we might be better served by having a formal MPC with its majority advice becoming binding. My own view is that we should be moving towards an MPC system, but in a phased manner. There are some pre-conditions to be met. First, 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. 

 So we get two ideas from this speech:

  • TAC members do not vote. They can only voice their suggestions/views
  • Final call on the monetary policy decision is of the Governor.

RBI just released its minutes of TAC held prior to May -2011 policy (a practice which started only since Jan-11 monetary policy). The minutes say:

While four members of the Committee were of the view that the repo and reverse repo rates be raised by 25 basis points each, two members suggested 50 basis points increase each in the repo rate and the reverse repo rate. In addition to increase in the policy rates by 25 basis points each, one member was of the view that the statutory liquidity ratio (SLR) could be increased by 100 basis points and the repo facility of the Reserve Bank be limited up to 2 per cent of excess SLR securities held by banks. A member also felt that the Reserve Bank could consider certain controls, if capital inflows became excessive.

Out of 10 members, we seem to have clarity over 8 views:

  • 2 for 50 bps hike
  • 4 for 25 bps hike
  • 1 for 25 plus 100 bps SLR hike plus 2% repo facility
  • 1 for capital controls (don’t know the take on policy rates)

Despite majority views for 25 bps hike, final decision was for 50 bps hike. Based on this views pattern media has assumed Governor voted for 50 bps hike as his is the finla call.

Where would Alan Blinder put this composition of TAC? Though, Alan Blinder has looked at MPCs which are more formal and vote, still one can look at this more informal TAC. In his research Blinder classifies MPC as three types:

In a series of papers beginning with Blinder et al. (2001), I have suggested the following three-way classification of MPCs.

  • An individualistic committee is founded on the principle of individual accountability. It does not insist on achieving consensus – by which I mean group agreement on a decision – when that is difficult, but instead makes decisions by something approximating majority vote. It also often speaks with multiple voices. The Bank of England and the Swedish Riksbank seem to be two examples of this committee type.
  • By contrast, a collegial committee is founded on the principle of group accountability. It strives for, indeed may insist on, a consensus decision that everyone on the committee can embrace, and it may or may not hold a formal vote. Such a committee generally speaks (figuratively, and perhaps literally) with a single voice. I have further suggested subdividing collegial committees into two types, according to how consensus is achieved.

 

  • On an autocratically collegial committee, whether by design or tradition, the chairman more or less dictates the consensus and expects other members to fall in line. The FOMC under Chairmen Burns, Volcker and Greenspan (but not Bernanke) were clear examples.
  • On a genuinely collegial committee, the chairman is less dominant. Members basically agree in advance to reach a group  decision, and then they accept the result even if they are not entirely happy with it. The ECB Governing Council is probably the most prominent contemporary example of this type. 

TAC fits between the two types of collegial committee types. By design it is like autocratic collegial committee where Governor has the final say on the decisions.  However, from the minutes one gets a feel of a genuinely collegial committee where members agree to reach a group decision.

Future minutes will help understand the committee structure better….

 

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