The Hindu Business Line : Monetary Policy making — Transparency under the scanner

Though not an institutional arrangement like the UK's Monetary Policy Committee that guides and chalks out the policy and influences expectations, the Technical Advisory Committee on Monetary Policy, set up by the RBI, will hopefully act as a catalyst for public opinion, especially of academics and serious financial journalists, to pressure the Government to institutionalising policy committees to serve greatest good to the greatest number. There are still many miles on this path, but it is worth traversing, says A. Vasudevan.

ON JULY 8, the Reserve Bank of India announced through a press release that it is setting up a Technical Advisory Committee on Monetary Policy (TACMP). To be chaired by the Governor, it would have four members `external' to the RBI and an internal member, a Deputy Governor in charge of monetary policy. The external members would include one academic, one former central banker, one former senior official of the Finance Ministry now turned academic, and a financial market specialist. The terms of reference are to `review' macroeconomic and monetary developments and to `advise on the stance of monetary policy'. The views of the TACMP would be `discussed' in the meeting of the Committee of the Central Board (CCB) after the meeting of the TACMP.

The CCB, that represents the RBI's Central Board, meets every week. Its decisions are final and cannot be vetoed by the full Central Board. At least one member of the Central Board other than the Governor and the Deputy Governors should be present at the CCB meetings.

It is important to remember that the TACMP is not set up by the Government of India or as a specific requirement under the Reserve Bank of India RBI Act. It is also important to appreciate that the TACMP will not meet the CCB; only its views would be placed before the Board for discussion either by the Governor or the Deputy Governor. The TACMP is not tasked to give its advice on policy matters; it is to only advise on the `stance' of policy. So far, the `stance' is explained in the Governor's policy statements with some indicative statistical magnitudes for those who care for quantification.

The TACMP, however, can take a view that the multiple objectives of a policy that forms the core of the official stance are not suitable and only one objective, say, inflation targeting, should be assigned priority in the year ahead. But one has good reasons to doubt whether the TACMP, as it is constituted, would dare to take such a view, going against the grain of forward looking central banking of the day. If the TACMP prefers inflation targeting — a view expressed by the former central banker now a member of the Advisory Committee in many of his columns in the financial dailies — it could do so but it would have to provide enormous empirical justification in support of this view. It is doubtful if the secretariat of the Advisory Committee — a department of the RBI — would oblige a request for such a technical work on inflation targeting.

It is obvious that the views of the TACMP would be taken on a consensus basis. The press release does not indicate that there will be voting at the TACMP meetings on any issue under reference.

In any case, one cannot constitute a committee with voting powers without ensuring that there is some balance in the number of internal and external members.

It is necessary to be clear that the formation of the TACMP does not mean that the RBI would have hereafter an institutional arrangement akin to the Monetary Policy Committee in the United Kingdom, to guide and chalk out the policy and influence the expectations.

In terms of transparency, the TACMP apparently looks like an improvement over the current situation where the chief executives of the RBI take policy decisions but only in consultation with the Government, as required by law.

The problem is with the law. Any one who has some idea of policy economics would take a bet that law-makers would not change the provisions of the RBI Act to make policy making more transparent.

Under the present legal framework, there cannot be an institutional arrangement such as the Monetary Policy Committee. Perhaps, one cannot also have a member of the Central Board in a formal committee that discusses policy stance or policy measures before policy announcements. If this logic is correct, one can easily guess as to what would be the role of the economists in the Central Board.

The formation of the TACMP is neither a necessary nor a sufficient condition to gain greater transparency in monetary policy practices.

It is only a formalised consultative process about which a briefing is given to the CCB and ipso facto to the full Central Board. The CCB may not like to discuss the views of the Advisory Committee; it may merely take note of them.

By formalising the consultative process, the RBI has, however, gone one step further of the attempts of the past Governors beginning with Dr I. G. Patel till 1992 to have ad hoc and occasional meetings with economists on all matters relating to the Indian economy and monetary and credit policy.

Why is it that lawmakers who are willing to change the provisions relating to the Statutory Liquidity Ratio and the Cash Reserve Ratio are not willing to change the institutional mechanisms relating to policy making as a whole? Let me venture to offer two possible explanations here.

One is that once transparency in monetary policy practices is established, there would be pressure from the public, in general, and from interested groups, in particular, to have transparency in fiscal policy practices as well.

That would render Budget-making much more open than now. Very few governments, whether in India or elsewhere, would be willing to give up the veil of secrecy involved in the exercises relating to the preparation of the Budgets.

The second explanation has to do with the accountability of the monetary authorities that would follow from the establishment of transparency in monetary policy practices. It would also imply that the monetary authorities would be more autonomous than now.

This could at times lead to the openly airing of views by the monetary authorities divergent from those of the government — a situation governments would like to avoid especially if they are coalitions of a variety of political ideologies and interests.

An autonomous monetary authority is likely to gain credibility in a more convincing manner than the government that is perceived to be not strong enough.

It is not that there would be complete unanimity of views even when the RBI is not autonomous.

In the RBI's history, there had at least been one instance when the Governor questioned the authority of the Government to announce, without consulting the RBI, a measure that was regarded as one falling in the jurisdiction of the Central Bank.

The Governor had to resign. The lesson of this episode is that there can be no greater public good than a coordinated fiscal and monetary policy frame.

It is perhaps necessary to add that there are some who believe that a formalised structure, such as the monetary policy committee, suffers from the disadvantages of a `group think'.

This view seems to suggest that committees could be so formed that its members would favour the positions that the executives would prefer.

As the credibility of a committee would depend on how established are the credentials of the members as independent, there is every reason to believe that care would be taken to have committee members who command market confidence.

In open market oriented economies, policy transparency is essential and for that a strong public opinion has to be built up.

Hopefully, the formation of the TACMP would act as a catalyst for public opinion, especially of academics and serious financial journalists, to pressure the Government to institutionalising policy committees in order to serve greatest good to the greatest number.

It is true that we have still many miles to go but the path is worth traversing.

(The author, a former Executive Director of the Reserve Bank of India, can be accessed at asurivasudevan @hotmail.com)

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