The Hindu Business Line : Beginnings of an independent central bank

It has been a considerable time coming. The FOMC, which is charged with the responsibility of determining US interest rates, has been around for as long as one's memory as has the European Central Bank (ECB) — which has full freedom to act on interest rates — and its German predecessor, the Bundesbank.

But the Bank of England's Monetary Policy Committee (MPC) is a recent creation. Before the UK, Australia and New Zealand `autonomised' their central banks giving them total flexibility on interest rates, provided Government-set inflation targets are met.

Things are, at the moment, very different in India. The RBI may have a board of directors, including government and public nominees, but it seems to have had nothing to do with monetary policy and interest rates. These are part of a semi-annual credit policy formulated by the Governor in office in consultation with his senior executives and perhaps inputs and feedback from the Finance Ministry.In the past several years, one must say, the system has not been put to any stern test. Interest rates have only been coming down as inflation crashed from double digits to the low singles allowing the RBI to fund the Government when necessary without risk.

But times are changing. The economy is breaking out of the long-derided `Hindu' rate of growth. The real economy and financial markets are increasingly intertwined with the global system. Thus, apart from the scare of inflation, the US Fed's successive interest rate increases surely played a role in our rates moving up 50 bps in the last year.

Of late, the Government and RBI have been singing slightly different tunes on interest rates. The Finance Minister and his officials have been saying interest rates will be — nay even kept — low. The Governor has been treading a more cautious line.

What exactly then does the appointment of this sort of `shadow' — deliberately with a small `s'— committee mean and portend? Clearly, in today's brave new world, the RBI needs a forum to bounce its ideas and brainstorm. The `wise' men will also have their own take on what policy should be.

It stops there. For the present, the committee will have no official role. That's it. No releasing market-moving minutes of policy meetings, how many and who voted for what, as in the much looked-forward-to minutes of the FOMC and Bank of England's MPC proceedings.

Not yet perhaps but that time will surely come. The induction of the `wise' men is a first and sure step to increasing the independence of India's central bank.

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