Responding to the ongoing debate on the draft Financial Code submitted by the Financial Sector Legislative Reforms Commission (FSLRC) over the creation of an independent monetary policy committee, Reddy said the likely changes in these matters will have to be seen in the light of whether they would strengthen the RBI and the governor.
He said, in the past seven years, a majority of the RBI governor's monetary policy decisions were against the advice of the committee whose members were appointed by the governor himself. "Much depends on the institutional framework and the relationship between the governor and the government. Therefore, it should be based on trust and not on any other thing," he said.
The issue of whether the government or the central bank governor should have the right to appoint majority of the members in the monetary policy committee (MPC) would not determine the monetary policy decisions that are complex in nature.
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According to Reddy, the mainstream thinking was that the governor should have the benefit of advice through a committee irrespective of who appoints the members. In most of the countries, the committees have fixed tenures and work across the political cycles unlike in India where the RBI governor can be removed at any time without even giving a reason, he said.
Delivering the inaugural lecture on macro policy issues at the biennial conference of the Association of Indian Economic and Financial Studies (AIEFS) at the University of Hyderabad, the former RBI governor and the chairman of 14th Finance Commission also said the transmission of monetary policy in India was difficult because of the administered interest rates and the government ownership of the public sector banks.
Commenting on the proposal to create an independent debt office while separating these functions from the RBI, Reddy said no country had moved to separate the debt functions from their respective central banks after the government debt zoomed post the global financial crisis.
On inflation targeting, he said it required a little bit of freedom in tradeoff between inflation and growth when our country was undergoing structural transformation. He said exclusive attention to inflation had built up asset bubbles and therefore it was not advisable to focus too much on inflation.