The popular English nursery rhyme ‘Baa Baa Black Sheep’ could be rephrased as: Bah, Bah RBI have you any problem? To which RBI will respond: “Yes sir, Yes sir, 24 floors full of them!” (Its head office is a 24-floor building). To the central bank’s several problems, add another one: filling vacant positions at the Monetary Policy Committee.
In 2016, the RBI adopted two major reforms. First was the adoption of inflation target, and the second, of keeping inflation under target, was delegated to the MPC. The six-member MPC team has three members appointed by the RBI, and three by the Government of India. The three members from the RBI were: Governor, who was also the chair of the committee, Deputy Governor in-charge of monetary policy, and an RBI officer nominated by the RBI Board. The RBI Governor and Deputy Governor will be on the committee till their tenure. The terms for the three government nominees is four years, and they’re not eligible for reappointment.
The government first nominated these members in September-end 2016, and their four-year tenure is coming to an end in September. Given the scale of the crises, there are suggestions that their tenure be extended. This will require the government to make exceptions, and we have to wait for the final decision.
In these tough times, there are some other issues pertaining to the MPC that need to be highlighted.
First, we should avoid making appointments in such a way that the three external members have to go at once. Currently, the MPC is played like a version of cricket where when one batsman is out both batsmen at the pitch are ruled out and new batsmen come in. What is instead needed is the actual cricket-like approach where a new batsman at the pitch finds a partner who advises on the pitch conditions and the quality of bowling. It is really tough to find three new candidates at the same time for the MPC. A better approach would be to extend the tenure of one or two members and allow the other(s) to retire. This will allow continuity in the MPC, and also make it easier to find new candidates in each appointment cycle.
Second, some of the recent changes in the MPC could have been avoided. In an earlier article, I had argued how following Viral Acharya’s resignation, no appointment was made for six months, and then Michael Patra was selected for the position. BP Kanungo replaced Acharya as an MPC member for six months. In January, Patra was promoted as Deputy Governor and was made in-charge of monetary policy. Patra replaced Kanungo making it highly odd to see one Deputy Governor replace another.
The problems didn’t end with this appointment. Before becoming the DG, Patra was the member of MPC as a central board nominee. In January, Patra’s position was filled by Janak Raj who was Executive Director and in-charge of Monetary Policy Department. However, Raj was to retire soon and could participate in only three monetary policy meetings held in February, March and May. There are speculations that his position will be filled by Mridul Saggar who has replaced Raj as the Executive Director of Monetary Policy Department. Ideally, the RBI could have appointed Saggar right at the beginning as this would provide continuity.
The third connected point is that the RBI Act is silent on the nature of appointment of this one MPC position appointed by the RBI central board. The tenure of other five members is specified in the Act, but there is no clarity on this position. Ideally, this position should also be fixed for four years and not be eligible for reappointment. The Act should also tell the central board not to appoint people who are about to retire soon.
Fourth, the MPC members should be picked from a more diverse pool of experts. The challenge for the global and Indian economy has shifted from high inflation to resurrecting economic activity and financial stability. The RBI Governor also recently spoke on challenges of financial stability. In fact, the RBI’s MPC design is such that it does not discuss matters pertaining to financial stability with the media. Financial stability is not a silo matter and research shows how it has deep linkages and impacts economic activity, and, thereby, inflation as well. The RBI also releases the Statement on Developmental and Regulatory Policies, which is explained by other DGs who are not part of the MPC but have a bearing on its outcomes.
The other central banks have either developed separate forums such as the Bank of England’s Financial Policy Committee or Norway’s Monetary Policy and Financial Stability Committee, which has experts balancing the twin goals of monetary and financial stability. These require wider changes in the RBI Act, and perhaps more opportune to discuss when the inflation targeting is reviewed next year. Till then, some diversity in selection of members is highly welcome.
To sum up, the government should quickly announce whether it will extend or appoint new members for the MPC. It should also take this opportunity to appoint the fourth Deputy Governor whose position is lying vacant since March. This is not the time for last minute announcements or surprises as markets could then surprise everyone else. The RBI is fighting fire in each of its 24 floors, and needs the best fire-fighters at its disposal.Amol Agrawal is faculty at Ahmedabad University. Views are personal.