The composition of the monetary policy committee, as suggested by the revised draft of the Indian Financial code, put out by the finance ministry on Thursday, swings in favour of the Centre. The draft, recommends a seven member committee, headed by the RBI governor, who will have the casting vote in case of a tie while taking the decision on policy rates. The panel has suggested two members (excluding RBI governor) from the RBI — one nominated by RBI board and the other, by the governor. The other four members will be appointed by the central government. The recommended composition is in contrast with the Urjit Patel committee recommendation, which suggested a five member team — two external and three from the RBI.
The decision-making process in monetary policy varies across countries. According to a handbook published by the Bank of England-State of the Art of Inflation Trageting-2012, most central banks have adopted a committee approach for monetary policy decisions.
Price stability
The Finance Ministry and the RBI, only a couple of months back, agreed to put in place a monetary policy framework to focus on inflation targeting, which the central bank had been pushing for. The Consumer Price Index (CPI)-based inflation targets — below six per cent by January 2016 and four per cent thereafter, with a band of plus/minus two per cent — were set in line with the Urjit Patel committee recommendations.
There is a convergence of views in both developed and developing economies that price stability has to be the main objective of monetary policy. According to the handbook, at the start of 2012, 27 central banks have adopted inflation targeting as their monetary policy framework. In majority of the countries — 15 out of 27 — the inflation target is decided both by the government and the central bank. In nine countries, the central bank sets the target, and in three cases — Norway, South Africa and the United Kingdom, the target is set by the government. Among the nine industrialised countries, Sweden is the only country in which the government is not involved. The consensus is that above three to four per cent levels, inflation is a cause for concern.
All 27 countries, that follow inflation targeting policy, use the consumer prices index (CPI) as their operational target — using the headline figures, rather than the core measure.
Who takes the decision?
In most inflation targeting countries, decisions are steered by a committee. In 13 countries, the policy decision is taken by the Board of the central bank and in 11, the monetary policy committee decides on the policy rates. In some countries, such as Armenia and the Philippines, there is a two-stage process under which an internal monetary policy committee or advisory committee makes recommendations to the board, on which the onus of taking monetary policy decision lies. As far as the decision making process is concerned, 18 countries that target inflation, decide on policy rates based on a majority vote rather than a consensus decision. The Governor usually has the casting vote. Eight central banks decide through a consensus, while in New Zealand, the governor is the sole decision maker.
Size of the committee
On an average, the committee is a seven member team. Of the 27 countries, 11 have a seven member team. Poland has the largest numbers of members —10 — on its policy making committee. While there is no clear pattern on the composition of the board or MPC, very few countries have government representation on the decision-making committee. These include Colombia, Guatemala and the Philippines. In other countries, such as Hungary, Romania, Turkey and the UK, the government is a mere observer and does not have the right to vote.