Inflation targeting in democratic India…

As one was reading this piece by Anantha Nageshwaran, came across this interview by Dr YV Reddy. Both in their own way suggest a need to rethink the new regime of MPC driven inflation targeting in India.

Anantha is more severe with his criticism of both the framework and the media’s recent take on RBI-FinMin rift:

Much ink has been spilt on a recent remark by Reserve Bank of India (RBI) governer Urjit Patel. At the post-monetary policy press conference this month, he said the government of India had asked for a meeting with members of the monetary policy committee (MPC) and that they refused to travel to Delhi to meet with government officials. In a country where the so-called elite are always on the lookout for reasons to beat up the government with—and this government in particular—the RBI governor has given them a perfect story. David has slain Goliath.

Now, if only reality were so simple. Central banking independence is something of recent origin. Like all economic constructs and arrangements, its origins are political. Partially, it is a triumph of the interests of financial markets over the real economy, particularly over the working class. It is also anti-democratic in the sense that on certain matters, it seeks to place unelected technocrats—mostly academics unschooled in the real world of commerce, economic value addition and employment generation—ahead of the elected and accountable government.

Emphasis is mine. Ouch that!

He says there was nothing bad about Finance Ministry wanting to meet MPC officials. There is a standard practice in many developed countries like UK and Japan where Government has a view on policy.

He adds we need to rethink on the symmetric inflation target:

there is a case to revisit the symmetric range around the 4% inflation target for India. In fact, the lower bound should be 3% and the upper bound, 6%. It sends a signal that given India’s current state of economic growth, it makes sense to worry more about an inflation undershoot than an inflation overshoot.

Moving over to Dr Reddy who brings an institutional dimension to the problem, given his vast experience:

Amid a heated debate over the relationship between the RBI and the finance ministry, how do you assess its evolution over the decades?
Globally, the concept of independence of central banks came around the 1970s. So, it’s not as if it was embedded in the institutional arrangement. In India, it was settled around 1963, when (Jawaharlal) Nehru said the RBI was within the structures of the government. It was only after the reforms of the 1990s that we carved out a position for the RBI, and even then it is dynamic. Independence depends on two things — the context and the nature of the central bank.
What do you mean by the nature of the central bank?
Generally, people equate a central bank with an exclusive monetary authority, whereas we are a more traditional, full service central bank. Now that (model) is preferred. This is the wisdom of the global financial crisis. Now, the direction is of accountability and a little more coordination. In the context of monetary policy, the literature says coordination is better enabled by having a full service bank. Once you have a full service bank, the nature of the relationship with the government depends on the nature of activities the RBI is doing. If you are a banking regulator, the nature of the relationship is slightly different from being a monetary authority.
But, isn’t this where contradictions between multiple objectives crop up?
The whole issue is whether independence of each of these functions is better for the system. What did England do? First, they took away banking regulation. They have brought it back now. So, you do get some advantages from coordination. When you are asking for independence, subconsciously you are assuming that the RBI is responsible especially for monetary policy. Now let us say, they achieve the inflation target but banking goes for a toss. Then? The Reserve Bank and the Governor were earlier judged on several facets. And the RBI board consisted of people from different segments of society whereas the MPC represents economists dealing with the monetary policy. However, the monetary policy is not merely a technical issue.
Read the whole thing. He says NPA issue should have been resolved by the owner but now the regulator is asked to resolve it which is unconventional. Then this whole RBI MPC and Finmin issue is a perception one.
Earlier also, there was a piece on need to rethink on the inflation targeting regime given its boas on keeping agri prices low.
This blog has always highlighted why we should not just copy these regimes from west and elsewhere. So not surprised it is already showing cracks. It was never thought through from the lenses of Indian socio-economy at the first place.

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