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RBI authority intact in panel pill

Mumbai, Jan. 22: The Reserve Bank of India has asserted its independence over the conduct of the monetary policy by deliberately leaving out the alarming and objectionable elements of Justice B.N. Srikrishna’s recommendations submitted last year after carrying out a comprehensive review and re-drafting the laws governing the country’s financial system.

The first thing that RBI deputy governor Urjit Patel’s report submitted yesterday set out to dump was the proposal by the Financial Sector Legislative Reforms Commission (FSLRC) that the Centre ought to decide the predominant objective of the monetary policy and any secondary objectives in consultation with the RBI governor.

The Patel report said that inflation targeting should be the sole objective of the monetary policy and it should be measured on the new inflation gauge based on the consumer price index (combined). It said the nominal anchor should be set at 4 per cent with a band of +/- 2 per cent. It set a two-year horizon to attain the target.

The RBI panel also nixed the plan to appoint more external members on the monetary policy committee (MPC) than members from the RBI itself.

The creation of the MPC is designed to replace the existing system where the RBI governor is the sole authority to take monetary policy decisions after a series of consultations with in-house and outside experts.

The MPC was first suggested by Justice Srikrishna, who headed the FSLRC which submitted its report in March last year to finance minister P. Chidambaram.

The Srikrishna report had suggested that the MPC ought to have five external members but only two of them would be picked in consultation with the RBI governor. The other three members ought to be appointed solely by the Centre.

Fearing that its independence in the conduct of monetary policy would be undermined and circumscribed if the Srikrishna report was accepted, the Patel panel said there ought to be only two external members and both should be picked after consultations between the RBI governor and the deputy governor.

The panel also steered clear of Justice Srikrishna’s proposal that a representative of the government should be a non-voting member of the MPC to articulate the views of the finance ministry.

The Srikrishna report had said “a representative of the central government would participate in the MPC meetings, but would not have a vote. The representative would express the views of the ministry of finance and these views would be released into the public domain”.

Chidambaram had a very fractious relationship with former RBI governor Duvvuri Subbarao after the latter refused to heed the finance minister’s repeated calls to cut rates and kick-start a stuttering economy.

The Patel report significantly doesn’t provide any role for the government in the conduct of the monetary policy — and this could set the stage for another round of confrontation between Mint Road and the North Block.

Raghuram Rajan had formed the Patel committee soon after he assumed office as the RBI governor on September 4 and had given it three months to come out with the report. He had also asked it to take into consideration the recommendations of the Justice Srikrishna panel.

However, not every one has been in favour of using the CPI (combined) as the inflation gauge for the conduct of monetary policy.

Last August, Subbarao had said it was difficult to base monetary policy decisions on the CPI alone because of the present composition of the index.

“The new CPI inflation series has only 19 data points which is not sufficiently long for statistically robust analysis. Second, in the new CPI, food prices comprise nearly 50 per cent of the index, making the movement of CPI relatively more sensitive to food price changes. This implies that the influence of supply-side factors could dominate the trends in CPI,” Subbarao had said.


Justice Srikrishna report

• Centre, in consultation with RBI chairperson, will determine monetary policy objectives. Each objective will be a quantifiable, verifiable target

• Monetary policy should be conducted by seven-member committee with decisions taken through majority voting

• RBI governor will chair the MPC. There will be one executive member of the RBI’s central board on the MPC

• Five external members on the MPC. Two will be appointed in consultation with the RBI governor; the other three by Centre

• Representative of the central govt, expressing the views of the finance ministry, will participate in MPC meetings, but will not have a vote

• Centre will define what constitutes a failure to meet monetary policy objective. In such an event, RBI governor will explain reasons for failure, propose programme of action and specify time horizon to attain the objective

Urjit Patel report

• Inflation should be the nominal anchor for monetary policy framework. This nominal anchor should be set by RBI as its predominant objective of monetary policy

• Five-member monetary policy committee (MPC) will conduct monetary policy through majority voting

• RBI governor will head the MPC. RBI deputy governor and ED, in charge of monetary policy, to be members

• Two external members on the MPC will be picked by the RBI governor and the deputy governor

• No mention of any role for govt in either framing the monetary policy objective or having a representative at MPC meetings

• Failure will be defined as inability to attain inflation target of 4% for 3 successive quarters. All MPC members will sign a statement, giving reasons for failure, propose remedy, and period over which inflation will return to target zone

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