Govt role in monetary policy-making to stay

Urjit Patel panel suggestions to be accepted only after major changes; most monetary policy committee members may be external

The recommendations of the high-profile Urjit Patel committee will be accepted only after major modifications, with the government expressing reservations on some key proposals. While consensus has been reached on certain key issues, others are still being deliberated.

If the recommendations are altered, it will take away the essence of the Patel panel’s suggestions, aimed at putting an end to the government’s intervention in monetary policy-making. The committee, formed to strengthen India’s monetary policy framework, had recommended sweeping changes such as formation of a monetary policy committee (MPC) and inflation-targeting.

According to the Patel panel, the MPC was to have five members, with the Reserve Bank of India (RBI) governor as chairman, the deputy governor (in charge of monetary policy) as vice-chairman and the executive director (in charge of monetary policy) as member. The panel had said the two other members of the MPC would be chosen by the MPC chairman and vice-chairman.

However, the government has proposed most MPC members be external. It also suggested the members be appointed by the government, in line with the recommendations of the Financial Sector Legislative Reform Commission.

“There is concern if the RBI governor heads the monetary policy committee, the majority of members---which are internal---will not take an independent view. And, since the RBI governor is appointed by the government, it is quite natural the MPC members will be selected by it,” said a senior finance ministry official.

The Urjit Patel panel’s report had said, “The government should eschew suasion and directives to banks on interest rates that run counter to monetary policy actions.” The committee had also suggested RBI primarily target four per cent inflation, with a deviation of 200 basis points. Now, it has been decided the target will be fixed by the government.

“There is an element of conflict of interest if RBI set its own target. It might set a soft target. On the other hand, the government might go for a tough target. So, it has been decided the target should be practical and should be made after consultations with all stakeholders,” the official added.

On the inflation targeting proposed by the committee, discussions are still underway. Finance ministry officials are preparing a detailed presentation before the Prime Minister’s Office, whose view on the issue will be vital.

The Patel committee had proposed the nominal inflation anchor be based on the Consumer Price Index. It had recommended the MPC be made accountable for failure to achieve the nominal anchor. “Failure is defined as the inability to achieve the inflation target of four per cent (+/- two per cent) for three successive quarters,” the panel’s report had said.

CHANGE OF LAW

Composition of monetary policy committee

PATEL PANEL: The Patel panel had said MPC would have five members, with the RBI governor as chairman, deputy governor (in charge of monetary policy) as vice-chairman and the executive director (in charge of monetary policy) as member. The two other members would be chosen by the MPC chairman and vice-chairman

GOVT: The government has proposed most MPC members be external. It also suggested the members be appointed by the government, in line with the recommendations of the Financial Sector Legislative Reform Commission

Inflation-targeting

PATEL PANEL: The Patel panel had suggested RBI primarily target 4% inflation, with a deviation of 200 basis points

GOVT: The government feels if RBI set its own target, it will lead to conflict of interest and the target might be a soft one. It feels the target should be set after consultations with all stakeholders