Monetary Policy Committee - Pre and Post

Monetary Policy committee – Pre and Post

Monetary Policy committee is a new chapter in the illustrious history of RBI functionality. The government has recently appointed a six member committee to assist and take a balanced decision on monetary policy.  Before we submerge ourselves into the detailed reasons behind this move, let us first peep into the relationship between the RBI and the Government. This relationship is basically a union of monetary and Fiscal mastery. Post 70`s worldwide, the duo have worked in tandem but have often been contradictory to each other’s needs. For example, in the case of India, it was post 1990 that fiscal liberalization started inventing measures to improve various economic indicators through effective legislative and administrative actions. The supplement to drive this growth was an ever expanding need of capital. And since then the worded policy and executive action of RBI have become a subject of public scrutiny and legislative supplement.

Worldwide, this mutual relationship has survived with mutual coordination; especially due to the symbiotic nature of economic needs. One of the foremost examples was be the FED decision to continue expanding credit and money supply by lowering rates in response to Ronald Reagan ,the then US President’s call for housing for all Americans. Another equally important development was the emergence of the Euro which is a monetary functionality where different fiscal units despite being sovereign entities decided to forge unity. There are numerous success stories despite hidden fault line and omission.

Coming back to the Indian context, barring a few occasional short lived impasse and verbal insinuations, the RBI and the Government have worked in tandem. The first litmus test happened in the era of ex RBI Governor Mr. Subbarao, who’s passing remark at the time of his retirement speech “I was left alone in my fight to tame inflation…” bemused everybody and explained the nadir of the relation. Similarly discussed insinuations were publicly examined in Mr. Rajan’s period as well. 

Why this? The objectives of both monetary and Fiscal policy are not divergent. Both want high growth, low Inflation, adequate liquidity, low interest rate, stable exchange rate and good employment numbers. But the cycle and time lag is what makes these assessments different bringing in lots of subjectivity into the action.

A carefully drafted RBI policy narrates hawkish underline with liberal action whereas in opposite a dovish worded assertion have been squeezing policy numbers. The impact appears to be contradictory for the businesses and markets.

There has been long demand in India to make the Monetary Policy framing body more democratic with denial of RBI Governor the power of veto to the entire consultancy process. So far all the Governors enjoyed this institution endowed superiority and went against popular market, business or fiscal preferences. Many a developed countries have gingerly diluted this either by making it more democratic or transparent. We finally have allowed the ice to melt and now we have six member bodies in monetary policy committee to spell out the monetary policy actions of RBI.

The credit must be spelled in favor of both the government and ex-RBI Governor Mr. Rajan, who together agreed and inked the details without any public noise and petulance. Here the supplementary sanctimonious action of Government by appointing three Academicians instead of Business lobbies is exemplary. Trust the new committee in its judgment will strengthen the union of Monetary and Fiscal policies and will herald a responsive era to business needs.       

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