T C A Srinivasa-Raghavan: Monetary policy - By majority voting or veto?

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T C A Srinivasa-Raghavan: Monetary policy - By majority voting or veto?

OKONOMOS

T C A Srinivasa-Raghavan / New Delhi February 22, 2008

"The specific characteristics of the Indian economy, including the 'realpolitik', render unified and centralised decision making responsibility and authority for monetary policy necessary"

You wouldn’t think central banks were given to pursuing the diktats of fashion, but these days no one seems immune. Just look at the way they have gone about adopting the key fashions of the day and you realise how fashion-conscious they can be. There are two kinds of ‘in’ things. One is policy fashion, as it were, such as increasing or decreasing interest policy rates or liquidity. This is called policy co-ordination. The other is institutional fashion such as setting up, say, monetary policy committees and such like.

As can be expected from an old and conservative society, India always plays catch-up because it tends to accept the need for change only slowly. The RBI is, therefore, a bit like what good old Madras used to be before it became Chennai — behind the curve where the latest vogue is concerned. But the gap is narrowing, certainly in respect of institutional matters.

Be it the excellent but subsidised lunches for the staff or monetary policy committees, the RBI is with it. This survey by Michael Debabrata Patra and Amaresh Samantaraya of its Monetary Policy Department focuses on the latter, leaving the former perhaps to some future historian of the Bank. Both are highly accomplished economists, not given to shouting from rooftops.

“Since the late 1990s,” they say, “the monetary policy committee (MPC) is ushering in collective decision-making on monetary policy among central banks across the world.” Playing catch-up, the RBI set up its own MPC only as late as July 2005. But collective decision-making was not quite its cup of tea, as the last MPC — called the Technical Advisory Committee (TAC) on Monetary Policy — showed. It was in favour of a rate cut when it met in January. But it failed to persuade the Governor, who declined to oblige, at least for the time being.

In this cross-country survey of the functions of MPCs and how empowered they are, the authors say that “an Index of MPC Empowerment… suggests that the more empowered MPCs seem to deliver better inflation results but with little improvement in growth outcomes relative to their less empowered counterparts.” The authors should have discussed further this trade-off between empowerment of the MPCs on the one hand and inflation/growth on the other, deriving, if you will, a sort of new Phillip’s Curve. Next time, perhaps?

They add, however — perhaps with a view to the RBI’s peculiar situation (it is a kind of man for all seasons) — that “majority voting may weaken accountability and may also reduce the informational efficiency of decision making.” In short, the governor must have a veto. Or what works elsewhere doesn’t work here because “the approach to reform has been gradualistic, including in the context of the monetary policy framework. The institution of the TAC reflects this choice of pace and sequencing…The specific characteristics of the Indian economy, including the ‘realpolitik’, perhaps, render unified and centralised decision-making responsibility and authority for monetary policy necessary.” Naturally.

So what sort of an MPC does India need? “For India, at the current juncture, the choice is a separate TAC; advisory; collegial; large by international standards; more external members than internal; restrictions on public issuances by members around policy review announcements; quarterly meetings; voting without publication; continuity with change. The way forward will be assessed in the context of the more complex and varied role required of the central bank currently and as it evolves… In the “genuinely collegial” MPC, members may argue strenuously for their own points of view behind closed doors but they ultimately compromise on a group decision of which each member then assumes ownership. In any case, there is no (or negligible) public disagreement. The ECB’s Governing Council appears to be such an MPC.”

This paper has laid down the ground rules. Will the next RBI governor change them? Regardless, those who are invited to the MPC or serve on it need to read it carefully.

RBI Occasional Papers, Monsoon 2007,
http://www.rbi.org.in/scripts/PublicationsView.aspx?id=10203

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