Rbi Group Moots Monetary Panel

The Reserve Bank of India (RBI)-constituted advisory group on transparency in monetary and financial policies has recommended the setting up of a Monetary Policy Committee (MPC) on the lines of the Board for Financial Supervision (BFS) from the next financial year. It said that the MPC should hold meeting on monthly basis on a predetermined date and issue a short statement immediately after the meeting.

The group felt that there is merit in the authorities clarifying issues in monetary and financial policies in simple language to general public.

In order to reduce the conflict between the Centre and the RBI, the group observed that there was a need for transparent setting of objectives of the monetary policy by the government with provisions for flexibility subject to making it public and tabling it in the parliament for deliberation on the objectives.

 

The group suggested that the RBI and the government should progressively work towards greater clarity in publicly setting out the objectives of monetary policy.

It recommended legislative changes in the RBI Act so as to facilitate a mechanism for an effective monetary policy and ensure that market developments could be fostered by providing facilities to the RBI to deal with any violation of the regulatory framework.

While analysing the process of monetary policy formulation, the group noted that there is a strong interaction between the RBI's responsibilities in the areas of monetary policy and internal debt management. This has resulted in a situation where the monetary policy function has become somewhat subservient to debt management.

"Debt management function puts RBI in a situation of direct conflict of interest," it said.

On the issue of transparency, accountability and autonomy of the apex bank, the advisory group is of the view that the central bank needs, by way of autonomy, headroom to operate monetary policy and this is possible when debt management is separated from monetary policy and the fiscal situation is in reasonable balance.

The advisory group on fiscal transparency has recommended amplifying the scope of the Fiscal Responsibility and Budget Management Bill (FRBMB) to include the essential elements of a budget law, and to provide for public availability of information on macro-economic assumptions regarding gross domestic product (GDP) growth, inflation, export and import growth, current account deficit, saving and investment rates, and to project major categories of expenditure and revenues.

Other important recommendations of this group relate to increased reporting on contingent liabilities, major tax expenditures, quasi fiscal activities, fuller discussion of the consolidated position of central and state governments and availability of information on the overall public sector balance, as also simplification of the tax structure.

Further, it observed that the fiscal practices at the state level were generally behind the standards achieved at the central level. The group has suggested that the State Finance Secretaries Forum could determine a set of minimum standards on transparency which all state governments should achieve within a three-year period.