Monday, 26 September 2016

The mechanics of monetary policy committees

After the appointment of government nominees to the monetary policy committee (MPC), the spotlight now shifts to how exactly this panel will work

Urjit Patel (RBI) governor

With the appointment of government nominees, the committee that will decide India’s monetary policy is in place. Now, the spotlight shifts to how exactly this panel will work.
Pami Dua, director of the Delhi School of Economics; Chetan Ghate, a professor at the Indian Statistical Institute, and Ravindra Dholakia, professor of economics at the Indian Institute of Ahmedabad, join Reserve Bank of India (RBI) governor Urjit Patel, deputy governor R. Gandhi and executive director Michael Patra on the committee.
While RBI has a history of working with the technical advisory committee (TAC), the terms of engagement with the new monetary policy committee (MPC) will be different.
For one, unlike TAC, where the voting was anonymous, the MPC framework requires the central bank to share the minutes of the MPC meeting, 14 days later.
These minutes will include details of how each member voted and also their statement justifying the reasons for voting in favour or against a resolution. 
 “It has become very onerous for external members now as these statements will be made public,” said Indira Rajaraman, an economist and a member of the technical advisory committee. Just like the technical advisory committee, MPC external panellists are also part-time members, appointed for four years.  Second, this greater accountability requires MPC members to meet regularly
The amended RBI Act prescribes at least four meetings a year.
TAC used to meet once in a quarter and for about three hours, wrote Ashima Goyal, economist and TAC member in a 19 September Mint op-ed.
Note that established policy boards such as the ones in Bank of England meet at least eight times a year and members receive an extensive staff briefing on the economy a week prior to the policy day.
Their meetings, too, go on for days, like for instance, the two-day conferences of the US Federal Reserve Open Market Committee.
Third, sharing of information to external members will also be key to informed decisions. One complaint among TAC members was their limited access to information, according to a top RBI official speaking on condition of anonymity. The amended RBI Act says MPC members can now request at any time, “additional information, including any data, models or analysis”.
Fourth, the role of the central bank governor and her/his deputies will also change under the new regime. In the past, the governor just had to listen and act independently.
A Mint story showed that rate decisions under governor Raghuram Rajan’s tenure were not in accordance with the majority TAC view most of the time. But any disagreement with MPC members will have a larger implication for policymaking.
A market participant said on condition of anonymity that any dissonance in the views of MPC members and the governor could spell uncertainty and disturb the markets.
 “The TAC was advice, and after that the governor and the finance minister did as they liked. The MPC is an executive body. It makes the decision,” said Ajay Shah, economist and researcher at the National Institute of Public Finance and Policy.
According to the monetary policy framework, agreed by RBI and the government last year, the central bank will look to contain inflation within a band of 4% plus/minus 2 percentage points. The amended RBI Act says that the panel “shall determine the policy rate required to achieve the inflation target”.
Will the MPC start functioning before the 4 October policy review?
We will know by 27 September since RBI will have to publish the schedule of meetings at least one week before the first meeting for the year.


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