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Dont Hijack RBIs Monetary Policy Role

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Hold the RBI to account, do not undermine it
It is welcome that the government has clarified that the draft code put out by the Financial Sector Legislative Reforms Commission is just that: a draft, and not necessarily a reflection of the government's thinking. If the draft were to become the law, the RBI will become a toothless body while core monetary policy will shift to the government. If the Urjit Patel committee's recommendation to vest policy-setting powers in all-RBI committee was a piece of central banking power grab, the present recommendation is an attempt to divest the RBI of any rate-setting power, even as it remains tasked with containing inflation. The government should rethink the code.
One lesson from the 2008 financial crisis is that monetary policy in a globalising world has to shed its obsession with inflation and target multiple goals -financial stability , growth and stable prices -with multiple instruments: variable margins, quantitative limits, interest rates. Policy-making has to be context-sensitive and cons ultative, not rule-bound or left to a group of professionals whose expertise is deemed error-proof. Unless fiscal policy is harmonised with monetary policy,macroeconomic stability cannot be achieved. Consultation must mean a genuine exchange of views so as to inform each party's conduct with the concerns of the other. Packing a monetary policy committee (MPC) with a majority of government nominees genetically programmed to crawl when asked to bend and stripping the RBI governor of veto power together spell diktat, not consultation.
An MPC with non-RBI members to discuss policy rates is eminently desirable, to break RBI groupthink. But the responsibility for deciding monetary policy must stay with the RBI. Give the RBI governor a veto power. That will also make him accountable. And he must be held to account every quarter by a multiparty committee of Parliament, to which he must convincingly explain the rationale for RBI policy. And that explanation must be made available in the public domain, to be digested and debated by an informed public discourse.
The Economic Times, New Delhi, 27th July 2015

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