We should have constituted a Regional Monetary Policy Committee instead…

I don’t know but on monetary policy front, we tend to pick either out of date ideas or rejected ones (not the same). The whole idea is to just copy some idea happening elsewhere without giving it much thought. It was fine if inflation targeting was adopted before  2008 but we have adopted it now when most inflation targeting countries are just following it superficially at best.

Even when we have adopted inflation targeting, we continue to target exchange rate markets. Exchange rates is one of the first things central  banks give up on targeting inflation. Infact it was troubles with exchange rate monitoring which led central banks to look for alternatives which started with money supply and now interest rates. Read any central bank which (used to) practice IT and they tell you the same – we did away with exchange rate management.

But post adopting so called modern/ avant garde IT framework, our intervention in exchange rates  have also increased. This can obviously be seen with rising foreign exchange reserves which are shown as signs of strength. If we were actually serious about inflation targeting, these numbers should have disappeared from media reporting.

Some might say well we are being pragmatic too and need to defend the exchange rate from global volatility. Well, this is actually the reason we did not adopt IT at the first place despite several committees telling us so. Now we have adopted IT but continue to look at all other things like the older days. On superficial matters, we actually are in line with the other IT central bankers!

Moving further, now we have just notified setting up a Monetary Policy Committee. The thinking is that it will take the onus from one person to a couple of persons.This literature too had become a vogue following Blinder’s works on the same. This blog too covered this strand of research.

However, the time is ripe to look at whether MPCs have actually delivered? We have seen that in central banks having MPCs things have hardly changed much. All we have is a few dissents here and there with the view of the head prevailing at all times. I am still not aware of any instance whether the outcome was against the interest of the head of the central bank. Yes it could lead to some debate and disagreements with the chief but does not mean much. This must be happening even without MPC as we see in current arrangement of TAC as well. One has serious doubts whether it has delivered other than getting too many cooks at the table to spoil the broth.

India’s case was even funnier. We wanted a MPC (as western central banks have it) to bring the onus on a team but also wanted the veto power to remain with the chief!  Now we will have 6 members figuring what should be the right interest rates given the inflation but it will be chief’s view which is likely to prevail. It will be really interesting to see when 4 people wanting a different stance from the other two including the chief, and latter losing on the vote. This will most likely never happen (never say never though) as the chief is then no more a chief.

This is perhaps the reason why most relatively well functioning central banks like Canada, New Zealand and Australia do not really follow the MPC noise. They of course stay away from exchange rates as well.

Coming to a more constructive point. This was a great time for the government to introduce regional dimensions in MPC. After all we are making changes in RBI Act and so on. But again it does not dig deep enough and just does what is happening elsewhere.

We should have called it instead a Regional Monetary Policy Committee ( One is really bad at coining names and people can come with better names/acronyms).

If we need to pick up something from a western central bank (US Federal Reserve in this case), it is how do we bring regional representation in our monetary and banking discussions. The idea should be to not remove focus from one person on monetary policy but also remove focus from one region to a much wider regional representation. All we do in the name of regional representation is to float a committee once a while to look at regional disparities. And then after some deliberations, all this is buried till next committee digs it up.

It is amazing that we have not picked this issue all this while. Given India’s huge diversity, these regional issues should be brought to the forefront.  All policies on banking etc continue to come from Delhi/Mumbai with hardly any attention to regional matters. On fiscal matters too, there is now a clear attention to give more devolution of funds to states over centre. How about translating the same on monetary and banking matters too?

All our discussion on constitution of MPC is who should have more membership – govt or central bank? So, we have come with a compromise with 6 members 3 from each side:

Out of the six Members of MPC, three Members will be from the Reserve Bank of India (RBI), including the Governor, who will be the ex-officio Chairperson, the Deputy Governor, RBI and one officer of RBI. The other three Members of MPC will be appointed by the Central Government, on the recommendations of a Search-cum-Selection Committee, which will be headed by the Cabinet Secretary. These three Members of MPC will be experts in the field of economics or banking or finance or Monetary policy and will be appointed for a period of 4 years and shall not be eligible for re-appointment. The meetings of the MPC shall be held at least 4 times a year and it shall publicise its decisions after each such meeting.

It is actually a non-issue as govts should rule over these matters. Even here all five members will actually come from govt as governor and deputy governor are nominated by the govt.

Instead of this fight, the discussion should have been instead on how best to represent different regions on this committee? Should it be zonal and if yes how many zones?

It would have brought far more interesting discussion on the table other than the usual inflation/GDP much of which is nonsense. Banking and monetary habits differ significantly across the country but they are all treated as one leading to all kinds of policy implementation issues. We keep looking for all our solutions from the west whereas we could just learn from our neighbours.

But again we choose to go for standard stuff which will bring similar thinking and trained people to the table. How will this change things?

This regional representation will require Indian central bank to convert its regional offices into centres of research and policy. These centres would then bring economic insights from different regions of the country (like this one) making the overall discussion more lively and realistic. It will also provide employment to many economics/finance/law etc students who struggle to get economic research jobs in the country. These students could gradually take over senior policy positions based on their regional expertise adding much more to the table. We also should think who will fill these MPC places in future.

I mean there is so much which can be done. But this needs different kinds of lenses which we refuse to use.

4 Responses to “We should have constituted a Regional Monetary Policy Committee instead…”

  1. Anil Says:

    Dear Sir, I think IT and MPC, should be viewed in the backdrop of R3. Somehow with one individual hogging so much of limelight is rarely tolerated, specially in Indian bureaucratic scene. I am reminded of TN Sheshan. To curb the wings of an individual a committee was installed.

    Also RBI doesn’t seems to be targeting Exchange rates. In present governor stint Ex Rate fluctuated from 67-68 in heady days of Sep 13 when Dr Rajan joined, came down to almost 57-58 in May 14. And we are again at 67-68. And RBI has constantly made clear the they will do their best to reduce the volatility but are not targeting and levels.
    The Idea floated of regional centers is worth exploring. I dont know why most experts are not talking about it. Specially the kind of diversity we have and the role of institutions outside the preview of RBI control, regional perspective can provide rich insight. Again media/experts has focused more on individuals rather than processes and procedures.

    PS: Thanks for the wonderful links.

    • Amol Agrawal Says:

      Hi Anil,

      Thanks as always for your comments. Highly appreciate your time.

      Well, MPC was idea which has been debated for sometime now. All previous committees have talked about it. As I say we just tend to copy whatever the west says without looking at how it can be suitable for us.

      Actually the point I simply made about exchange rates is this only. Why even target volatility? How do you know when something is volatile? SEBI also does not try volatility for equity markets either. You move to IT to let exchange rates move freely. Given IT is nearly an year old now, we should have let exchange rates float increasingly. But we can’t do that given global issues? Why adopt IT in that case?

      I really don’t know why this regional dimension is not looked into. It is just such a sitting duck. We have amazing stories on banking and finance which will be only shared with rest of the world, if we allow these regional research centres to flourish. All we do is talk about regional disparity and so on. But really do not build institutions which could address these at a monetary/banking level.

      • Anil Says:

        Dear Amol Sir thanks for your response,
        I agree with your point that Exchange rate should be allowed to fluctuate(barring extreme cases like when Market hit circuit breaker), given you have given the legal sanctity to IT. And I hope RBI follows its words of not intervening in exchange rates in letter and spirit.

        But regional dimensional is so much missing. If regional centers are encouraged we would have stories of many more Safars and Chettiyars. We should have more people working closer to ground. I appreciate your view for SEBI the way it has worked for years without creating noise.

        Silver lining is that atleast RBI and NITI are inviting students for Interns for longer terms. But there is still a long way to go.

        Regards,
        Anil

      • Amol Agrawal Says:

        Hi Anil,

        Please call me Amol. No Sir please. Internships are welcome but dont help in the regional bit. We need regional monetary/banking centres to bring the stories of Chettiars ets as you say..

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