X

Sign up for Equitymaster's free daily newsletter, The 5 Minute WrapUp and get access to our latest Multibagger guide (2018 Edition) on picking money-making stocks.

This is an entirely free service. No payments are to be made.


Download Now Subscribe to our free daily e-letter, The 5 Minute WrapUp and get this complimentary report.
We hate spam as much as you do. Check out our Privacy Policy and Terms Of Use.
Monetary policy: new rules, new actors - Outside View by S.S. TARAPORE

Helping You Build Wealth With Honest Research
Since 1996. Try Now

  • MyStocks

MEMBER'S LOGINX

     
Login Failure
   
     
   
     
 
 
 
(Please do not use this option on a public machine)
 
     
 
 
 
  Sign Up | Forgot Password?  

Monetary policy: new rules, new actors
Mar 21, 2015

A proactive government role should not result in the RBI losing its powers altogether.

February 20, 2015, is a watershed in the relations between the Reserve Bank of India and the Centre. For the first time an agreement has been formally signed by the RBI and the government, setting out the primary objective of monetary policy of maintaining price stability while keeping in mind the objective of growth.

Under the agreement, the RBI will aim to bring inflation below 6 per cent by January 2016, and for the financial year 2016-17 and all subsequent years, the target shall be 4 per cent with a band of plus or minus 2 per cent (according to clause 2 of the agreement).

The RBI shall be seen to have failed to meet the target if inflation is (i) more than 6 per cent for three consecutive quarters for the financial year 2015-16 and all subsequent years, and (ii) less than 2 per cent for three consecutive quarters in 2016-17 and all subsequent years (according to clause 6 of the agreement). There appears to be asymmetry between the upper bound and the lower bound for inflation. Moreover, there appears to be inconsistency between the target (in clause 2) and the determination of the failure (in clause 6).

If this asymmetry is a conscious decision it has far-reaching implications for the operation of monetary policy in 2015-16. Given that the year-on-year inflation rate as of February 2015 is 5.3 per cent, prudent management would warrant that the RBI rule out, in the first half of 2015-16, any relaxation of policy interest rates and ancillary policy measures.

Operating procedure

Under clause 4 of the agreement it will be incumbent on the RBI to publish the operating target(s) and establish an operating procedure through which the operating target will be achieved; any change in the operating target in response to evolving macro-financial conditions shall also be published. It is not clear whether there would be provision for a force majeure in the case of, say, a war, a natural disaster or pestilence.

In case force majeure is to be cited it does not appear to be appropriate to alter the targets through the operating procedure, but there should be an amendment to the agreement signed by the government and the RBI. It is hoped that the monetary policy review of April 7, 2015, would be used to publish the operating procedure.

A vital element in the new monetary policy order is the setting up of a monetary policy committee (MPC). There are sharp differences between the FSLRC and the Urjit Patel Committee on the constitution of the MPC. This issue has been discussed in extensio in earlier columns.

The agreement is notably silent on the setting up of the MPC. The FSLRC recommends an eight-member committee of which only two would be RBI executives and the government would appoint five external members.

Further, there would be a non-voting executive of the government. In contrast, the Urjit Patel Committee recommends a five-member committee of whom three would be RBI executives and two would be external members. The FSLRC model for the composition of the MPC is contrary to the set-up in all the major countries; there is probably no country in which the external members outnumber the executive members.

Insidious recommendation

The FSLRC recommendation is insidious in that it is a blatant attempt to make things awkward for the RBI by holding it accountable for the decisions of the external members. If the RBI is to be accountable it should have a majority of executives on the MPC.

The FSLRC proposal has a proviso for a veto for the governor. If there is such a veto it would be best to continue with the present technical advisory committee. It would be meaningful to have no veto for the governor but in that case the Urjit Patel Committee model should be followed while setting up the MPC. Having a government executive on the MPC, albeit without voting rights, would go against the spirit of an MPC. Big Brother may not have voting rights but can have an overbearing dominance over the working of an institution.

A match referee cannot also be the third umpire, the umpire on the field, a player and also a spectator. Such a ridiculous proposal goes against the grain of the present government's fundamental philosophy of maximum governance with minimum government. Hence, the FSLRC recommendation on the composition of the MPC should simply be tossed out.

The amendments to the Finance Bill 2015 set out in paragraphs 154-157 imply that the money market regulatory powers would be taken away from the RBI. Such an important measure has not earned any mention in the Budget speech. The government has been quick to reassure that the RBI's powers in the money market would not be taken away and that the provisions in the Finance Bill 2015 would be amended. This leaves one with the uncomfortable feeling that goblins have surreptitiously introduced fundamental changes in financial legislation. The government would do well to deactivate the goblins.

Please Note: This article was first published in The Hindu Business Line on March 20, 2015.

This column, Maverick View is authored by Savak Sohrab Tarapore. Mr. Tarapore, is an economist and he runs his own Multi-Language Syndicated Column. Mr. Tarapore's other column, which appears in The Freepress Journal, is titled Common Voice.

Disclaimer:

The views mentioned above are of the author only. Data and charts, if used, in the article have been sourced from available information and have not been authenticated by any statutory authority. The author and Equitymaster do not claim it to be accurate nor accept any responsibility for the same. The views constitute only the opinions and do not constitute any guidelines or recommendation on any course of action to be followed by the reader. Please read the detailed Terms of Use of the web site.

Equitymaster requests your view! Post a comment on "Monetary policy: new rules, new actors". Click here!

  

More Views on News

BSE Sensex at All Time High; ONGC Among Top Gainers (Market Updates)

Jul 18, 2018 | Updated on Jul 18, 2018

Markets all time high analysis : The bse sensex at all time high; ONGC among top gainers. Find the latest update, special reports and news on all time high gainers of BSE Sensex at equitymaster.com.

BSE Sensex at All Time High; ONGC Among Top Gainers (Market Updates)

Jul 18, 2018 | Updated on Jul 18, 2018

The BSE Sensex has hit an all-time high at 36,748 (up 0.5%) with ONGC among the top gainers.

Two Meetings That Nailed the Idea of Owning Brilliant Smallcaps Without Buying Them (The 5 Minute Wrapup)

Mar 22, 2018

Certain blue chips hold the potential of delivering returns comparable to small-cap stocks. With these stocks, you can get the best of both worlds.

A Sense of Melancholy (Vivek Kaul's Diary)

Jul 18, 2018

...

Mere Paas HRITHIK Hai... The Mother of All Trading Stocks (Profit Hunter)

Jul 18, 2018

You are missing out big gains if you don't own these 8 stocks.

More Views on News

Most Popular

How to Avoid a 90% Loss Suffered by This Super Investor(The 5 Minute Wrapup)

Jul 12, 2018

Blindly following super investors is a dangerous game to play. Here's how you can avoid such mistakes.

The Answer to Your Wealth Worries: Small Caps (Especially Now)(Profit Hunter)

Jul 10, 2018

If you're worried about the markets - you are on the wrong track. This is opportunity - put your wealth-building hat on, instead - Richa shows you how...

The Multiple Problems with the Minimum Support Price (MSP) System(Vivek Kaul's Diary)

Jul 11, 2018

The price signals that MSP sends out, creates its own set of problems.

New Fund Offer - ICICI Prudential Pharma Healthcare and Diagnostics Fund - Should You Invest?(Outside View)

Jul 6, 2018

ICICI AMC launches an open -ended equity fund following Pharma, Healthcare, Diagnostic and allied theme.

When Disappointment Panda is Around. Buy Quality Stock like This!(Chart Of The Day)

Jul 6, 2018

Buy Companies that can fight all kinds of Pandas and Bears in the long run.

More

Small Investments
BIG Returns

Zero To Millions Guide 2018
Get our special report, Zero To Millions
(2018 Edition) Now!
We will never sell or rent your email id.
Please read our Terms

S&P BSE SENSEX


Jul 18, 2018 03:37 PM

MARKET STATS