Is it necessary to have a monetary Policy Committee?

Now the whole question is, is it better to have a committee taking a decision, rather than a Governor alone or a committee in which the governor clearly has the say to be able to decide on monetary policy, she adds.

According to her, the governor should have a veto because to do a veto he will have to do so with so much explanation.

However, Thorat is more concerned that the members should be appointed in such a way that they are independent and committed to the task of policy making full time. She wants them to have security of tenure. As well she wants the Governor too to be appointed for a fixed term of five years and not the 3+2 years that is currently in vogue.

Below is the verbatim transcript of Dr Subbarao's interview with CNBC-TV18's Latha Venkatesh

Q: At the outset, don’t we even need to debate whether we need to change the method of policymaking, are you convinced that a committee way of making the policy is going to be that much better than the current one?

Subbarao: In general, I believe that a monetary policy committee will add value to decision-making by bringing wider perspectives and making the monetary policy decision more contestable. In fact, as long back as four years ago, I suggested myself that we should be moving towards a monetary policy committee. However, the big questions are what is going to be the composition of the MPC on whether or not the governor will have a veto, I think those two issues are going to determine what value and how much value the monetary policy committee is going to add to decision-making.

Q: Are you not afraid that you cannot pin accountability, can a committee be made as accountable as the RBI?

Subbarao: I think so. I would still endorse a committee because the present system we have is the governor is making a decision by himself. Of course taking advise from whoever he wants, including our technical advisory committee (TAC). But if you have a committee which is appointed under the statute, I think there will be great accountability on all the members who are advising the governor as well as the RBI. I think it will add to decision-making provided of course that there is some mechanism by which the governor's view prevails at least in a transition period.

Q: Your thoughts now on how the committee should be constituted?

Subbarao: More important than the ideal composition than the numbers is who appoints, under to whom the members owe allegiance. So if the majority of the members of the MPC are government appointees, whether or not the governor has a veto, becomes quite consequential. If they are government appointees, admittedly they are experts, they are independent minded, they have great credibility but if there is tension that we saw between growth and inflation, members appointed by the government tend to owe allegiance to the government. My view is that they tend to take a biased view - biased towards the government's objective of growth rather than the RBI's objective of inflation. Notwithstanding all the caveats put in which is the inflation targeting mandate and all of them being collectively accountable, I think there still will be biased towards governments point of view.

Q: What should be a governor's role, a casting vote, a veto power or just an equal among equals?

Subbarao: There has been a lot of debate about whether the governor should have a veto or not and a lot of people said that if the governor has a veto, it will dilute if not vitiate the committee mechanism and the responsibility of the committee and the accountability of the committee. That is a respectable point of view and I have some regard for that. On the other hand we have a system, our democratic institutions are not very mature, the tension between growth and inflation often time plays out in a disagreeable way. Former Finance Minister P Chidambaram has said that in his article in Indian Express that 8 out of 10 time there is agreement between the governor and the finance minister or between the Reserve Bank and the government. P Chidambaram has been finance minister for much longer than I was governor perhaps he is drawing from his longer experience, but my own experience has been that the disagreements between the government and the RBI have been more frequent that the 20 percent that he alludes to. So if there is that sort of difference of view, it is very important that the governor who is ultimately responsible for delivering on inflation target, keeping of course in view the objective of growth, should have a decisive say. So coming back to your question, I thought about P Chidambaram's formulation and it looks very balanced - three from inside the Reserve Bank and 3 from outside appointed by the government and the governor having a casting vote. So it is not of course a veto but for all practical purposes, it gives the governor a veto.

Q: Do you see a painful transition period from the current system with the technical advisory committee to the new system where the committee makes the policy?

Subbarao: The transition problem will be about shifting from a technical advisory committee, the governor making a call himself through taking into view a committee view which has a greater responsibility and accountability. So the governor will have to persuade the committee to fall into line to his point of view. Even in the past when I was governor we had instituted the practice of disclosing the minutes of the TAC without the attribution of course. And every time the TAC minutes come out, there is sensationalism about how the governor disagreed with the TAC. That sort of playing up of the difference of views between the TAC or the MPC in this case the governor is going to be much more vigorous in a statutory setting. So I think we will have to be able to as a nation as an economy we need to appreciate that there are going to be differences of views but the governor will prevail at least in the initial period.

Q: Today the governor appoints the technical advisory committee members, but even then they disagree with him all the time. Is it not possible that the government's members will also disagree with the government?

Subbarao: I am not so sure. I don't want to pre-guess that. But it is quite possible that there are going to be differences in views, especially if the members have a different view of this growth-inflation balance than the Reserve Bank does. And there is also another point that has been glossed over in all this debate, I was quite struck by that. In the monetary policy framework agreement, it is written that the objective of the monetary policy is price stability keeping in view the objective of growth. I believe in the Indian Financial Code (IFC), the draft IFC, it is written as the objective of monetary policy is price stability keeping view the government's objective of growth. It is not the objective of growth but it is the government's objective of growth. So evidently a lot of value is being attached to adding or prefixing that government's objective of growth. So this tension between growth and inflation perhaps will play out and it will be important for the RBI, for the governor to manage this tension. You asked about the transition problem, this could be another transition problem for all of us who are stakeholders and particularly the RBI to manage this tension between growth and inflation and manage the disagreements if any.

Q: Is a monetary policy committee really necessary?

Thorat: Well, ultimately when you look at it the present Reserve Bank of India (RBI) act certainly makes the Governor clearly and squarely responsible. Although the government may from time to time give directions to the Central Bank it has never done so. So I think under the present system there is no scope for monetary policy decision making committee and therefore if you need that you do have to have a legal change.

Having said, from the legal point of view, the whole point is and this is partly the reason why the technical advisory committee has set up so that you get a diversity of opinion from different aspects of the public market participants and others to be able to inform monetary policy decision making.

Now the whole question is, is it better to have a committee taking a decision, rather than a Governor alone or a committee in which the governor clearly has the say to be able to decide on monetary policy. I think here the view is that would hold true to time is that ultimately whether it is the committee taking the view or the Governor taking the view. I think the composition of the committee is very important.

Q: There are countries in which there is an overwhelming majority of members who are appointed by the Central Bank. There are countries where the entire committee is appointed by the Central Bank and of course there are committees where the government has a fairly decent role. How should it be for us?

Thorat: One has to accept the fact that the governor, the deputy governor they are all appointed by the central government for a fixed tenure and same for the other number of responsibilities as well. So, the point is not who is the pointing authority. The point is how is the manner of their appointments, how will their tenure be and are they going to be people who are there because of the sort of being, because it is the kind of appointment the government is giving as some sort of recognition or what is it?

So I think it’s important and that is the reason why I feel that to get people to serve on the monetary policy is not going to be easy to be able to get the kind of people who are totally without any agenda, business agenda or any other interest and who are going to be quite  objective and are equally well informed about the nuances of the monetary theory, literature between monetary policy and financial stability and with the fiscal policy.

I mean one has to get very good people on to the committee and these people during the period they are going to be on the committee, are they going to be allowed to continue what they are already doing otherwise or you want them to be full-time members or you don't want them to have any conflict of interests. So that I would still say that the Reserve Bank core people who have got loyalty to their job and commitment and accountability as it says should really have the dominant say.

Q: The original Financial Sector Legislative Reforms Commission (FSLRC) draft had said it should be Governor and two members from the RBI. I would assume the Deputy Governor and immediate Director in charge of monetary policy. Two members appointed by the government on the advice of the Governor and two appointees of the government. That was the FSLRC proposal. P Chidambaram in a piece in one of the news paper said it could be three – three each with the Governor getting a casting vote in case of a tie. What would your best case be?

Thorat: Again and again I would say three- three or three-two whatever it is it now who is that other thing. What kind of people would they be and who is going to select them, who is going to be involved in their selection. Those are the kinds of questions I would seek answers for.

Q: Would you want them to be appointed through a rigorous search committee like the way the Governor is appointed? What should be the procedure involved to ensure that they are independent of the government in a sense.

Thorat: When you are appointing the governor, you are appointing him for three years. When you are appointing deputy governor you are appointing them for a term. You are appointing them really with them have everything at stake. So when you have an external member is that a similar kind of an appointment?

Q: What is the Governor’s role? Would you think that it should be first among equals, would should it be a casting vote, should it be a veto?

Thorat: I personally feel he should have the veto because to do a veto you have to do with so much explanation. However, I think ultimately I personally feel that it is important but you are going to use it only in exception case.

Q: What is the reasonable length of time you are looking at?

Thorat: You see the RBI core people they would be there and even then they would ensure continuity because if one of the short of nearing the full term and there is someone is going to take the place so I would expect the Governors term should be at least five years. As far as the external members are concerned, I think it would be reasonable to have minimum three years.

Q: Would you think that policy making will be genuinely better, is this progress?

Thorat: I think policy doesn't depend upon whether there is committee instrument of making it. It depends upon the expertise, it depends upon the objectivity, it depends upon the kind of gut feeling, it depends upon intuition it depends upon receptivity to various aspect of society. I do feel that if you have a set of people in RBI with all that it is as good as having the external policy making committee which is also good because then they have much more of stake and responsibility in contributing to the policy decision. They don’t have to just say something without any feeling of responsibility.

If you have such kind of people you, are going not going to be establish their accountability, there is no way. It is a repetition may be that when they contributed they said but who bothers about what the rest of the members of the monetary policy committee said or who said what and what was the outcome. Ultimately it is a collective - in which I would say that it is the Governor and his team.