Will the Monetary Policy Committee encourage difference of opinion and make it public?

In just about a week, a practice of four score years at the Reserve Bank of India would come to an end. The governor would no more decide interest rates. A group of six people would debate the state of the Indian economy and the direction it should take, and that will be the basis for the decision. At least, that is the purpose behind the shift to a Monetary Policy Committee ( MPC).

Just like many other concepts, the MPC is also borrowed from developed nations and is aimed at improving decision-making. It is also true that many other institutional arrangements in India are also based on the Whitehall model, but they hardly function the way the founders intended them to. It may be no different with the MPC. However, more than the decision of the MPC, the new system will be an enrichment over the previous one in the sense that broader public will learn about the debate that led to the committee’s decision. In a society where even minor disagreements are portrayed as enmity, the MPC members’ bigger challenge may not be economics but communicating that the very purpose of the body is to bring in differing views so that a decision doesn’t fall prey to one man’s passion.



“Providing a voice of dissent, if there is one, is a key function of MPC members elsewhere in the world,” says Jahangir Aziz, economist at JPMorgan. “They are expected to provide a public explanation about the factors that drove their own choices. We should wait and see how this communication is carried out.”

The government last week nominated Chetan Ghate of Indian Statistical Institute, Pami Dua of Delhi School of Economics and Ravindra Dholakia of the Indian Institute of Management, Ahmedabad, to the six-member MPC. Governor Urjit Patel, deputy governor R Gandhi, and executive director Michael Patra are the other members. If the voting is tied, the governor will have casting vote, but not a veto. Surprisingly, even among the usually envying academics, there is near consensus about the scholarship of these people to deliver on the mandate. But the members carry on their shoulders the responsibility of ending the opacity behind the rate decision and conveying their dissent without attempting to paper over the differences.

“You need to have people voicing their independent views, otherwise if everyone does what the governor is doing, you’re not any different from the current set-up,” Sonal Varma, an economist at Nomura Holdings told Bloomberg. “The only thing is whether people will be OK to be seen as dissenting against the governor.”

The conduct of MPC’s outside members will decide if Indian policy-making goes the US way, where members of the Federal Open Markets Committee express opinions freely. The other extreme is the Reserve Bank of Australia’s committee members, who keep everything secret as before, defeating the very purpose.

To its credit, the government has laid down in detail the responsibilities of the MPC members. The RBI shall publish the minutes of meeting on the 14th day after the meeting, which would reveal how a member voted with an accompanying statement, a half-yearly report on the sources of inflation, and the forecasts of inflation for a period ranging from six to 18 months. Some of these requirements are seen as an attempt to even surpass the Western nations and may pressure the members. “The requirement that a written statement from each MPC member, specifying the reasons for his or her vote, be placed in the public domain is a bit excessive," says Indira Rajaraman, economist and a former member of the RBI board. “A summary in the minutes of positions taken by MPC members would have been quite sufficient.”

Just like any other issue, economists’ community is divided. But the experience shows that even if the US and the UK setup are a bit noisy and occasionally dubbed to be confusing investors, they seem to have enriched decision -making. Former Bank of England Governor Mervyn Kind was outvoted many times and had to write many letters explaining why he failed to meet the goals set out by the government. Of course, there is enough scope to manufacture consensus too.

“I am told a certain former chairman of the Fed used to send his subordinate before the Fed meeting to check out the opinions of committee members and then his opinion was the majority,” former governor Raghuram Rajan had said. “He never ever lost the majority because he knew where the majority lay and that was his opinion.

Now, I am sure there is a little bit of exaggeration in this story but I do not think, I mean that is one way of ensuring the governor is never outvoted.” Whether it is transparency, or consensus, governor Patel holds the key.