July 28, 2015

In defence of the financial code

Courtesy: Bloomberg


Vivek Dehejia, along with Rajeswari Sengupta, write in defence of the proposed draft of the Indian Financial Code.


They write "...what has attracted the greatest ire of critics is the proposed seven-member monetary policy committee (MPC), which will be charged with setting policy rates to ensure that the inflation-targeting mandate, already enshrined in the monetary policy framework agreement between the Reserve Bank of India (RBI) and the finance ministry, is fulfilled....The most often repeated criticism is that, because four of seven members of the MPC will be appointed by the finance ministry, while only three will be internal to RBI, including the governor as chairperson, somehow the independence of RBI will be lost. Those who have been chanting this as mantra appear to be unaware of the fact that RBI at present lacks any form of statutory independence....

..Each member’s personal reputation will be on the line every time he/she proposes an action that ends up jeopardizing the inflation-targeting mandate. An MPC, which repeatedly fails to meet the inflation target, will lack credibility, and this is something no government would wish to happen. In a globalized capital market, the cost of an erratic and uncertain monetary policy, with attendant volatility in interest rates and exchange rates, would be damaging economically, and therefore politically....In other words, the presence of four external members is, in fact, a check on an MPC, which otherwise might be dominated by the governor, and therefore, would not be very different from the current system in which the governor is all-powerful".


Click here to read this Mint article.



Topic : State Capacity / In : OP-EDS
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