MPC internal members must think independently of RBI: Ashima Goyal

Ashima Goyal says the inflation-targeting band gives the MPC the flexibility to look through temporary food inflation

Ashima Goyal, former external member of the Monetary Policy Committee (MPC) and visiting professor at the Indira Gandhi Institute of Development Research (IGIDR), says the inflation-targeting band gives the MPC the flexibility to look through temporary food inflation. In an email interview with Anjali Kumari, she says, however, a problem can arise if there is too much focus on achieving and maintaining the centre-point target. Excerpts:

 

RBI has started providing core inflation forecasts. Do you think this clarity was much-needed for the market?

 

Yes, it helps in giving a sense of long-term or trend inflation beyond short-term volatility.

 

Does the relatively short tenure of external members of the MPC make it difficult to build institutional memory and consistency in monetary-policy decisions?

 

Even with the current tenure, it will help if all the external members do not change together. Then there will be some continuity.

 

Has dissent made the MPC better, or has the committee become more predictable and convergent over time? Do you think internal members should disagree more often?

 

Dissent is good, since it implies more exploration of the many aspects that affect the decision, leading to better understanding. In my term, I found disagreements happened more at times when the policy stance needed to change. Inflation-targeting has to be forward-looking.

 

To answer your second question, yes, internal members must be encouraged to think independently as MPC members, not as officers of the Reserve Bank of India (RBI) who find safety in groupthink. The individual minutes published do give a platform to express one's own thinking.

 

India’s inflation-targeting framework sometimes forces the MPC to respond to food-price shocks with interest rates. Does the framework give the MPC enough flexibility to look through temporary food inflation?

 

Yes, since there is a band and deviation from the band is feasible for three quarters before an explanation is required. A problem can arise if there is too much focus on achieving and maintaining the centre-point target.

 

Would you support giving the MPC a more explicit mandate to distinguish between persistent inflation and temporary supply shocks?

 

The memorandum of understanding (MoU) with the government is for flexible inflation-targeting, which specifically gives this mandate. It is important, even for markets, to be reminded of that flexibility. Publishing core inflation forecasts helps maintain a clear distinction between trend inflation and temporary inflation spikes.