Heaping praise on the monetary policy committee (MPC), former Reserve Bank of India (RBI) governor Y V Reddy on Friday said its formation in some ways is a continuation of the past practices, saying he could not have picked a better team.
"All the members nominated to the monetary policy committee of the RBI are economists with impeccable integrity, professional credentials, and a reputation for independent thinking. I could not have picked a better team. We are in safe hands," he said.
Last year, the government set up the six-member MPC to decide monetary policy stance, keeping in view the inflation target. The independent economists on the panel are Chetan Ghate, Pami Dua, and Ravindra H Dholakia. The MPC, headed by RBI governor Urjit Patel, also has deputy governor Viral V Acharya and executive director Michael Debabrata Patra.
While delivering the sixth Raja J Chelliah Memorial Lecture on 'Fiscal-Monetary Policy: Interface', Reddy said the MPC system is in someways an improvement over the technical advisory committee, which used to advise the RBI governor on monetary policy issues.
Traditionally, he said, the debate in the context of the monetary policy has been a choice between rule versus discretion, committee versus individual, targeting versus non-targeting, and independence versus coordination.
The global financial crisis has shown that the reality is "more nuanced and that of balance".
"The buzzwords now are constrained discretion, flexible rules and flexible inflation targeting. Similarly, there is an increasing emphasis on coordination along with independence.
Increasingly, the monetary policy is becoming more of an art even if it is not less of a science," added Reddy, formerly chairman of the Finance Commission.
He also referred to problems with the externally imposed policy and operational constraints from the public sector banks' point of view.
"They continue to have high burden on account of CRR as well as SLR. In addition to this, they have to go through priority sector lending," he said.
According to the former central banker, the future of financial system and modernisation of financial sector of India depends on how "we overcome the intractable problems of the public sector