How India can sharpen monetary policy regime
India will complete five years of inflation targeting in March 2021. As the Reserve Bank of India (RBI) prepares to revisit the inflation target, it is time to make this regime more transparent and accountable.
In a paper, economists Ilak
Patnaik and Radhika Pandey of the National Institute of Public Finance and Policy examine the monetary policy system that India adopted in 2016 and suggest three steps to strengthen the regime.
The RBI’s monetary policy committee could add one non-voting member representing the finance ministry, the paper suggests. The central banks of the United Kingdom and Japan have such examples.
A non-voting member from the government would not be meant to interfere in the central bank’s monetary policy, Patnaik and Pandey say. Instead, this could build coordination between the government’s fiscal policy and the RBI’s monetary policy.
The authors caution that the
government must not give the impression that this is to reduce the RBI’s independence. Currently, the committee comprises three members from the RBI, including the governor and a deputy governor, and three external members appointed by the government.
The second suggestion is that the RBI should publish transcripts of monetary policy committee meetings with a time lag. The central bank already releases the minutes of its meetings two weeks after the committee announces its decision. Releasing transcripts could ensure greater accountability of individual members in how they justify their decisions, says the paper.
Finally, the committee members should have staggered terms, the authors suggest. This would
ensure that the tenure of an entire committee does not coincide with the rule of one government.
Staggered appointments will help maintain the independence of the committee and avoid excessive political influence in policy decisions, say Patnaik and Pandey. To make it possible, the initial appointments may be for shorter terms than mandated, they say.
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