Noise over Indian central bank’s Monetary Policy Committee

One keeps wondering why is there so much noise over trivial things and nothing at all about things that actually matter. On inflation front, instead of debating about fundamental questions like whether we should have MRP (Maximum retail price), we worry over really trivial things like constitution of MPC and whether the chair of the central bank will have veto power or not.  That too seeing what little impact all this has over monetary policy. Whether the chairperson has veto power or not, his/her view usually sails through. There are hardly any cases where we have seen the chair;s views voted out by the committee.

Before, we get into the issue further, what is this whole issue about? In 2011 Budget, Indian givt set up something called Financial Sector Legislative Reforms Commission, The idea was to review and rewrite all the laws/frameworks pertaining to Indian financial sector. The idea was to modernise India’s moribund financial sector and make it jazzy like the western financial world. It was a huge effort and the committee put up the report in March 2013. Comments were sought from the public which again took about two years (why this long?). All who’s who of Indian finance (in India and abroad) were part of this process. Though, on becoming policymakers views of the same advisers changed over the report.

Now, the govt has put up a revised document after incorporating suggestions on the report. One keeps wondering who would have commented on the report? Finance and Financial laws is as elite as it can get. One seriously doubts public has any idea on what is going on. All such hifi finance is by the elite, for the elite and of the elite. But anyways, the process is much better than closed door writing and implementing of such laws.

The govt notice says:

The Financial Sector Legislative Reforms Commission (FSLRC) set up on 24th March 2011, for re-writing the financial sector laws to bring them in harmony with the current requirements, submitted its Report to the Government on March 22, 2013. The Commission inter alia recommended a non-sectoral, principle-based legislative architecture for the financial sector, by restructuring existing regulatory agencies and creating new agencies, wherever needed for better governance and accountability.

2. The Commission presented its Report to the Government of India on 22th March 2013. The Report is in two parts: Volume I – titled “Analysis and Recommendations” and Volume II – titled the “Draft Law” consisting of the Draft Indian Financial Code (IFC).

3. The Draft IFC along with the Report of the FSLRC were placed in public domain on the home page of website of the Ministry of Finance on 28th March 2013. Comments on the Draft IFC and the Report were invited from the public at large and all stakeholders through a Press Release on 6th June 2013. Hindi version of the Report was subsequently placed on the Ministry of Finance website in Sept 2013. A dedicated e-mail feedback-fslrc[at]nic[dot]in was created to receive online comments. Further, comments were requested from select Ministries/Departments and Regulatory Authorities. Copies of the report in English and Hindi versions were sent by the Hon’ble Finance Minister to all Members of Parliament in October 2014. Copies of the Report were also sent to all State Governments/Union Territories, and to Universities, Research/Academic Institutions, Bank Associations etc. in India for giving wide publicity and inviting comments.

4. The Draft IFC has been revised in the light of the comments received and hosted now as Revised Draft IFC(1 MB)PDF File Opens in a new window. The modifications mainly relate to : strengthening the regulatory accountability of financial agencies, removing the provision empowering FSAT to review Regulations, rulemaking and operational aspects of capital controls, monetary policy framework and composition of the Monetary Policy Committee (MPC), regulation of systematically important payment system and others, removing the provision of special guidance etc. Further the modifications have taken into consideration the enactments subsequent to the submission of the FSLRC report; namely The Pension Fund Regulatory and Development Authority Act, 2013 (PFRDA Act) and Securities Laws (Amendment) Act, 2014. However, the modifications in the revised Draft IFC remain consistent with the overall structure and philosophy of the FSLRC Report.

5. All stakeholders concerned are requested to forward comments/suggestions that they may wish to submit on the Revised Draft IFC by 8th August 2015 by e-mail to feedback-fslrc[at]nic[dot]in or in hard copy to FSLRC Division, Department of Economic Affairs, Ministry of Finance, Room No 30, North Block, New Delhi-110001.

I hardly read the previous report as well given its volume and the obvious agenda which was known well in advance.

In this one too, let me get to the area where recent fire has started. Part XI and chapter 64 deals with so called new role of Indian central bank. In this after talking about things like inflation targeting (from section 250-255), section 256 and 257 mentions about MPC and its form:

Section 256:
(1) The Reserve Bank must constitute a Monetary Policy Committee to determine Committee. by majority vote the Policy Rate required to achieve the inflation target.
(2) The Monetary Policy Committee will comprise –
(a) the Reserve Bank Chairperson as its chairperson;
(b) one executive member of the Reserve Bank Board nominated by the Reserve Bank Board;
(c) one employee of the Reserve Bank nominated by the Reserve Bank Chairperson; and
(d) four persons appointed by the Central Government.
(3) The Central Government must appoint the members referred to in sub-section 25 (2)(d) from amongst candidates selected by a selection committee constituted by the Central Government in accordance with Schedule 1.

Section 257:
(1) The Central Government will nominate one representative to attend all the 30 meetings of the Monetary Policy Committee.
(2) The representative of the Central Government may participate in the deliberations of the Monetary Policy Committee but will not be entitled to vote on any
resolution of the Monetary Policy Committee.
(3) The representative of the Central Government must prepare a statement, approved by the Central Government to be made before the Monetary Policy
Committee at each of its meetings.

There has been talk over the composition of MPC and whether it should have members appointed by RBI or Govt. I mean how does this question even arise? Of course it has to be the government. An MPC member will be a pretty senior appointment coming from outside the RBI. This is just like appointment of the Governor/Deputy Governor/RBI Board members. All this is done by the govt and so will be the case of MPC members as well.

Then another talk was on whether there should be five or seven members in the MPC? I mean does it really matter?

Moving onto the next set of controversy.  Section 258-62 further talk about things like need for a secretary for MPC who will do all the work (dirty that is), terms and conditions of MPC member employment, resignation conditions, information to be provided to MPC etc.

Then comes section 263 which has become the recent focus of attention. Within this section, it is point number 9:

(1) The Monetary Policy Committee must meet at least once every two months.
(2) The Reserve Bank must publish a schedule of the meetings of the Monetary Policy Committee for a financial year at least one week before the first meeting in that financial year.
(3) A meeting may be convened otherwise than in accordance with the schedule,–
(a) by way of a decision taken at a prior meeting of the Monetary Policy Committee; or
(b) if, in the opinion of the Reserve Bank Chairperson, a meeting is required and advance intimation has been given to all the members of the Monetary
Policy Committee.
(4) The decision to hold a meeting under sub-section (3)(b) must be published by the Reserve Bank as soon as practicable.
(5) A meeting of the Monetary Policy Committee will be chaired by the Reserve 35 Bank Chairperson and, in the absence of the Reserve Bank Chairperson, the
member of the Reserve Bank Board nominated to the Monetary Policy Committee.
(6) The quorum for a meeting of the Monetary Policy Committee will be five members, –
 (a) at least one of whom must be the Reserve Bank Chairperson; and
(b) in his absence, the member of the Reserve Bank Board nominated to the Monetary Policy Committee.
(7) Each member of the Monetary Policy Committee will have one vote for each proposed resolution.
(8) Decisions in a meeting of the Monetary Policy Committee must be taken by a majority vote of the members of the Monetary Policy Committee present and voting. 
(9) In the event of a tie amongst the members of the Monetary Policy Committee,  the Reserve Bank Chairperson will have a second and casting vote.
(10) The decisions of the Monetary Policy Committee will be binding on the Reserve Bank.
(11) Each member of the Monetary Policy Committee must write a single statement stating the reasons for voting in favour of or against proposed resolutions.

This has led to a lot of commentary (mostly noise) that the govt by not giving the chairperson veto vote is taking the powers away from the central bank.

First thing first. By getting this MPC kind of thing we are trying to democratise so called monetary policy decisions. So far policies have been done by the Governor and he/she is like a dictator in political parlance. The onus now shifts to the committee as a whole which is far more democratic. One will get different views and shape a more balance policy. So by giving veto powers, we again scale the game backwards. What is the point of having a MPC then?

Second, most MPCs function this way. Remember this is how fashionable modern central banks work today. So you can’t pick what you like and reject what you don’t. Much of this MPC design has come from Bank of England. The BoE minutes do not disclose names but barring a few dissents, the chair’s view usually sails through. The question of questioning the chair’s stance is rarely there. You can atmost have a few dissents but that is where it ends. There was just one major publicised fight between BoE chief Mervyn King and its MPC member David Blanchflower. The latter wanted the central bank to cut rates as 2008 crisis was just setting but former just ignored his advice.

Third, all this in no way suggests the current govt is taking powers away from RBI. This was a project of few elite advisers/policymakers of previous govt. The current govt is just continuing with the agenda. I don’t think that our PM or FM have much idea about all these games. Especially the PM who has far better things to do. MPC members are going to be just like any other central bank high level employees and the govt has every right to make policies in coordination with these new appointees of central bank.

Fourth and a more important question is actual effectiveness of such committees. If the chair continues to hold its weight, what is the purpose of such MPCs? A celebrated central bank chief full of hubris is unlikely to care for the views of MPC members and this eventually happens. It is a highly elite club where one does not ask questions in order to be a member. The earlier research on MPC committees by Alan Blinder et al showed huge promise over this democracy in central banking decisions. One is not sure anymore as the crisis has unfolded. There were hardly any different views. There can also not be different views with most members coming from similar universities and ideas. It is highly unlikely that MPC in India will change the game much especially with India’s highly celebrity governor.

So all in all, much noise over nothing really. Instead of looking at more important questions over price formation etc we are just getting lost in all these matters. But this is how it also happened in the west as well. The media and experts have for long stopped looking at matters of importance and instead focused on matters of trivia…

One Response to “Noise over Indian central bank’s Monetary Policy Committee”

  1. An online discussion forum on the Monetary Policy Committee: You are invited! | manasiecon Says:

    […] My humble post here:… […]

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