When it comes to policy, we tend to pick either out-of-date ideas or rejected ones. The whole idea is to just copy some idea happening elsewhere without giving it much thought. It would have been fine if inflation targeting – where in the central bank's stated objective is to ensure the country's inflation rate remains within a specific band – 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 are one of the first things central banks give up, when they start targeting inflation. In fact it was troubles with exchange-rate monitoring that led central banks to look for alternatives, which started with money supply and now interest rates. Look at any central bank that (used to) practice inflation targeting and they will tell you the same – we did away with exchange-rate management.
But post adopting the so-called modern/avant garde inflation targeting framework, India's 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.
Superficial matters
Some might say 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 inflation targeting in 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 inflation targeting central bankers!
Moving further, now we have just notified setting up a Monetary Policy Committee. The thinking is that it will shift the onus of forming monetary policy from one person to a couple of persons. This approach too had become a vogue following American economist Alan S Blinder’s works on the same.
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 dissenters 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 the MPC as we see in current arrangement of Reserve Bank of India's Technical Advisory Committee as well. One has serious doubts whether it has delivered other than getting too many cooks at the table to spoil the broth.
Half-hearted
India’s case is 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 Governor of the RBI! 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 want a different stance from the other two including the chief, and if the latter loses on the vote. This will most likely never happen 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 approach. 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 the 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.
If we need to pick up something from a western central bank (US Federal Reserve in this case), it could have been: 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 in a while to look at regional disparities. And then after some deliberations, all this is buried till next committee digs it up.
Diverse views
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 discussions on the constitution of MPC were pver who should have more membership – governmentt or central bank? So, we have come with a compromise with six members, three 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 governments should rule over these matters. Even here all five members will actually come from the government as the governor and deputy governor are nominated by the government.
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 a far more interesting discussion to the table other than the usual inflation/GDP debate, 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.
Regional focus
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 would require the 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.
There is so much which can be done. But this needs different kinds of lenses which we refuse to use.
This piece first appeared on on Mostly Economics.
