Monetary Policy Committee: A Welcome Move

The responsibility of deciding the monetary policy has rested solely on the governor of the RBI since 1934. The governor has had absolute power without any means to ensure accountability. 

The Indian Financial Code has provisions for the creation of a Monetary Policy Committee, a statutory body with both external and internal members, according to the recently issued draft.

Most other countries like UK rely on such a committee for their decision making and it is time that India does the same.

The benefits of a committee, instead of an individual, all-powerful decision maker are numerous. Even if a governor is extremely competent, it is unreasonable to expect that he will never falter. In 2008, Alan Greenspan, US Fed Chairman at that time, admitted that he made a mistake. His strategy of maintaining low interest rates resulted in the stock market crash, a financial disaster that the world has not fully recovered from yet.

A committee will ensure continuity. The monetary policy will not change with a change in leadership and this will help in pursuing a consistent monetary policy. A committee will be less susceptible to pressures, both internal and external. There have been studies that prove that decisions taken by a committee are better than those by a single person which only provides a scientific basis for what one knows to be common knowledge. Most importantly, decision making in this supremely important field will no longer be dependent on one person’s judgement alone.

One clause of the IFC recommends that the veto power of the RBI governor be taken away to ensure fairer decision making. This has been the cause of much contention, with sides vehemently speaking either for or against this move. The opposition says that the move will take away the autonomy of the governor and increase government control to an undesirable degree. Supporters of the move say that retaining the veto power will undermine the efficacy of the committee.  

However, Raghuram Rajan, the incumbent RBI governor, himself has no problem with the plan. In his words, “The government appoints everyone, even the RBI governor. So in that sense, it has a lot of control already. What is important is that the MPC coalesces into a body which wants to maintain its reputation for meeting its objective.”

Instead of doing away with the governor’s special status altogether, the governor could have the casting vote in the event of a tie. Any concerns that the government will insidiously control the monetary policy can be addressed by ensuring that even the external members are appointed in a democratic manner.

The formation of the Monetary Policy Committee is a welcome change and if handled correctly, will strengthen the central bank’s position as an institution more than undermine that of the RBI governor.



- Anusha Sinha