Would a more diverse monetary policy panel spell better RBI rate calls?

The approach so far has been to have three members from RBI, including its governor, and three external members. These members are appointed by the central government for a term of four years. 

The external members so far have been from the academic world, with five of the six being economists and one being an economist and financial expert.

How does it work elsewhere? The US Federal Reserve’s Federal Open Market Committee has 12 members, of which seven are from the Board of Governors of the Federal Reserve System, one is the Federal Reserve Bank of New York’s governor, and four are from America’s other seven reserve banks on a rotation basis. 

The Bank of England’s MPC has nine members, of which five belong to the BoE, including its chief economist; it has four external members who are from academia, though not necessarily economists. Hence the BoE’s model differs from ours.

The European Central Bank’s (ECB) panel has six executive board members and governors of EU-member central banks. As the ECB represents the entire euro region, all countries have to be part of its decision-making process. 

The panel of the People’s Bank of China has 14 members, including its governor and heads of other regulators, such as those regulating securities and insurance markets, with a few academics on its list. 

The Bank of Japan’s panel has nine members; it has the BoJ governor and two deputy governors, the other six being ordinary citizens appointed by Japan’s cabinet and approved by both its houses of parliament.

Models clearly differ across economies. In the Indian context, we have had a debate over whether the MPC would be better served by representation from fields beyond academia, such as industry or the household sector. 

The argument is that such a configuration would include members who can represent their group while voting on RBI’s rate policy. Compelling as this may sound, it risks extreme views being taken by group representatives who may overlook the larger picture in an effort to serve their respective constituencies. 

For example, members from industry may espouse rate cuts, as this would serve business interests well, while household representatives may see inflation as the principal concern. 

From the perspective of households, the official inflation number usually seems lower than perceptions of it. So, a representative may invariably favour higher RBI policy rates, especially if inflation stays sticky in a range of 4.5-5.5%.

The issue of real interest rates will likely be interpreted differently by these groups’ representatives.

Hence, independent external experts, in line with the present practice, may be the best choices for MPC membership.

Having economists as members has the advantage of getting diverse views that are backed by a strong theoretical framework, rather than perceptions or emotions. 

The counter argument is that people from large constituencies would have a practical outlook, which may work better than a theoretical one. Besides, economists could also be rigid, especially if they have strong ideological beliefs.

Keynesians and monetarists often have divergent views on monetary policy. Those who carry the Keynesian flag look at growth most of the time and link the repo rate to this variable. 

Those with monetarist leanings would focus more on inflation, as this school avers that inflation is always a monetary phenomenon everywhere, and hence interest rates should be used to contain it.

In today’s scenario, a repo-rate status quo has found support from those who argue that growth has been high and stable under the current interest rate regime, while inflation is yet to reach its 4% target. 

However, there is also a view that future growth will be impacted if the repo rate is kept high for too long. This makes the MPC’s policy vote outcomes interesting.

The current configuration’s advantage is that RBI members have an edge (its governor has a tie-breaker vote in case of an even 3-3 split). As the central bank keeps in touch with all aspects of the economy on a daily basis, it is able to place theoretical arguments in a practical context. This model can be said to have worked well ever since the central bank’s MPC was set up in 2016.

The question now being asked is whether there will be a change in the background of external members. Even if they are to be from academia, would other fields be considered? 

Of the two panels we have had, the first was dominated purely by economists while the second brought in a management perspective. There is also the option of economists who have served as bureaucrats and could bring in another layer of expertise. 

This assumes relevance because, while inflation-control and growth are primary and secondary aims, respectively, people’s aspirations must also feed policy. People from academia may lack the ground perspective that a seasoned bureaucrat could offer.

The MPC has an even more important role to play from now onwards. Growth is back on a strong path and inflation is as idiosyncratic as ever. A compositional change in the Consumer Price Index is on the cards, so the inflation target measure may alter. 

MPC meeting outcomes will be very critical for steering the economy and new members will have a critical role to play. Stay tuned for what happens from October onwards.

These are the author’s personal views.