Monetary Policy Committee Step In The Right Direction: YH Malegam

The government, this week, completed the appointment process of the monetary policy committee (MPC). Chetan Ghate, Pami Dua and Ravindra Dholakia have been picked as the three government appointees on the MPC. They will join the Reserve Bank of India (RBI) governor Urjit Patel, deputy governor R Gandhi and executive director Michael Patra on the committee.

With these appointments, the process of overhauling monetary policy in India is nearly complete. The RBI is now operating under a flexible inflation targeting framework and the responsibility of setting monetary policy will soon lie with the MPC and not solely with the governor.

Y.H. Malegam, eminent chartered account and member of the Financial Sector Legislative Reforms Commission, which was among the first to recommend an MPC, says this committee is a step in the right direction even though the committee could face challenges while following a single-indicator approach.

In the run-up to the shift towards a MPC driven system, questions were raised on whether such a committee could be unduly influenced by the government’s view on monetary policy. A counter argument to this was that a committee would be in a better position to withstand pressure when compared to a single individual. Malegam argued the latter. He added that the members appointed by the government are academics of high integrity and intellect.

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The move towards committee-based monetary policy making, will mean that the RBI will need a new communication strategy. While the RBI is still to clarify how the committee will communicate, markets will be watching to understand the leanings of each individual member. Unlike the case of the RBI’s technical advisory committee, the individual positions of the MPC members should be disclosed, said Malegam

The new monetary policy framework also build in greater accountability for the central bank. Should the RBI fail to meet its inflation objective for a specified period of time, the governor will have to explain the reasons to the government and also the steps being taken to bring inflation back in line with the target. This is an appropriate direction to move in, said Malegam while adding that asking the RBI governor to depose in front of a parliamentary committee may not be the right thing to do.