Power without responsibility

If the Centre has its way, the Reserve Bank of India (RBI) may soon find itself battling the inflation demon without complete control over the interest rate lever, its main weapon. And if it fails to slay the demon, it will still be answerable to the Centre, never mind that it was made to fight the battle with one hand tied behind its back. There is little ambiguity in the revised draft of the Indian Financial Code (IFC) over who the big boss of the Monetary Policy Committee (MPC) is. With a dominant four nominees in a total of seven and minus a veto for the RBI Governor, it is the government that will call the shots. The casting vote conceded to the RBI Governor will count only in the event of a deadlock, which can only happen if a government nominee is absent. These are unlikely scenarios. The casting vote is a poor alternative to the veto power, which was recommended in the FSLRC report.

But is it wrong for the government to seize control of the MPC? It may be tempting to argue that since economic growth is the overweening objective of any government, it is only proper that it has control over interest rates as well. Some point out that Finance Ministers and RBI Governors have been at loggerheads over the direction of interest rates; also, that it is the government that is finally answerable to the public if inflation soars. While there is a grain of truth in such views, they are overstated. The RBI is technically better equipped to monitor inflation and unleash appropriate strategies to combat it. After all, the very same IFC clearly states that one of the objectives of the RBI is to formulate and implement monetary policy. So, how can the government trammel the central bank in its pursuit of this objective?

The idea of a central bank is tied — almost inextricably — to the notion of functional independence. The virtue of this is to insulate the bank, and ipso facto, critical monetary policy decisions from political interference and pressures of populism. The idea of government nominees on the MPC goes beyond the practice followed by most other countries, where such committees are made up entirely by representatives of the central bank and independent members. Even if one concedes the need for government representatives, this should be done by creating a committee with a better balance — with either more central bank representatives or by vesting the Governor with the veto power. Under the monetary policy framework hammered out earlier this year, it was agreed that the RBI Governor would explain the reasons for not meeting inflation targets. This is more than just a tacit acceptance by the government about who carries the can on inflation. Given this, the recommendations in the revised draft of the IFC are tantamount to letting the government wrest power without vesting it with responsibility.

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