Mumbai, March 26: The Congress manifesto today said the Reserve Bank of India “must strike a balance” between price stability and growth while formulating the monetary policy — articulating a position that finance minister P. Chidambaram has consistently made in the face of stiff opposition from the central bank which has opted for inflation targeting as its sole objective.
The manifesto clearly indicates that the Congress — should it return to power — will back the Financial Sector Legislative Reforms Commission (FSLRC) chairman Justice B.N. Srikrishna’s report submitted in March 2013 that recommended that the Centre should set a “quantitative monitorable objective” for the central bank while setting out its monetary policy function.
The FSLRC had also said that a seven-member monetary policy committee should be established and inflation need not be its sole objective.
“If, in the future, the government felt that the appropriate goal of monetary policy was a fixed exchange rate, or nominal GDP, then it would be able to specify these goals,” the Justice Srikrishna report had said.
In January, a committee set up by the Reserve Bank of India under deputy governor Urjit Patel came out with its report on the framework for the conduct of monetary policy that sharply differed with the FSLRC report.
The Patel report said the RBI should focus on reining in CPI inflation and it suggested a “glide path” to bring it down to 6 per cent — a suggestion that governor Raghuram Rajan has enthusiastically embraced.
The Congress manifesto clearly gives short shrift to the recommendations in the Urjit Patel report and seems to smack of impatience with the RBI’s continued insistence on its independence in the conduct of the monetary policy.
The Congress manifesto said: “The recommendations of the FSLRC that require no change in legislation must be implemented immediately and, for the other recommendations, we must draw a time table for passing legislation.”
These observations could put the UPA government in confrontation with India’s central bank once again.
It may be recalled that a committee headed by Urjit Patel, deputy governor of the RBI, had recommended that inflation should be the nominal anchor for the monetary policy framework and this should be set by the RBI as its predominant objective in its policy statements.
More importantly, the committee also recommended that the RBI track the retail inflation number and follow a path or a target zone to bring it down to 8 per cent within a year and 6 per cent at the end of the second year.
The report said the central bank would eventually aim to achieve an inflation target of 4 per cent with a band of +/- 2 per cent.
In a broad hint that the RBI must focus more on growth, the Congress party said: “In a developing economy, we must accept that when our aim is high growth there will be a moderate level of inflation. The Reserve Bank of India must strike a balance between price stability and growth while formulating the monetary policy,” it said.
Rajan won’t be amused by this statement in the Congress manifesto since he has on several occasions pointed out that there is no trade-off between growth and inflation and that in the long-run bringing down inflation leads to sustainable growth.
The Urjit Patel committee had suggested that monetary policy decision-making should be vested in a monetary policy committee (MPC) that will be headed by the RBI governor.
The other four members of the MPC, it had said, would include the deputy governor in charge of monetary policy who will be the vice-chairman, and the executive director in charge of monetary policy. There will be two other external members who will be decided by the chairman and vice chairman on the basis of demonstrated expertise and experience in monetary economics, macroeconomics, central banking, financial markets, public finance and related areas.
However, the Srikrishna commission recommended that the conduct of monetary policy should no longer be the sole prerogative of the RBI governor, seeking to jettison a practice that has been in place since 1935.
The report said that there should be an MPC with seven members. The RBI would be represented by the governor as the chairperson of the committee and one other member from its board of governors.
In addition, there would be five external members. Two of these five members will be appointed in consultation with the chairperson, while the other three will be “solely appointed by the central government”, raising questions about how independent the panel itself will be and whether or not this seriously undermines the role of the RBI.
It also suggested that a representative of the central government would participate in the deliberations of the monetary policy committee (MPC) but will not have a vote.