Turf battle over monetary policy

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Bikky Khosla | 04 Aug, 2015
Conflict between the RBI and the Centre is nothing new. We have seen it time and again over the years, especially at times of monetary policy reviews and over growth versus inflation dilemma. But now the power struggle has intensified to a new level, with a revised draft of the Indian Financial Code calling for cutting the autonomy of the central bank and its Governor in deciding monetary policies and, in a new twist, a FSLRC member claiming that the new bill does not reflect the views of the commission, which actually favoured the Governor having the last word.

Who should, you think, decide monetary policy? While it is true that the Indian industry, which is carrying a heavy load of high interest rates, almost always pitches for a rate cut whenever the central bank reviews its monetary policy, it cannot be denied that the RBI established a track record of performance over the years. Raghuram Rajan, the present Governor, like most of the recent Governors, seems to hold the view that the central bank must primarily target inflation, and overall his success in this respect as well as in improving the country's external accounts is beyond doubt.

Another school of thought believes differently. They view that the central bank Governor - most of the times - gives too much attention to inflation and thus swings the pendulum far the other way. The government's concerns include not only inflation but also growth, investment and jobs. Rate cut is also key to kick-start manufacturing, capex cycle and infrastructure investments. So, we need to reduce influence of a single decision-maker. In addition, with the changing economic dynamics, a cohesive action plan has become imperative to address several factors that fall outside policy controls.

So, which side of argument you are on? Many a time in the past we have questioned monetary tightening measures by the RBI, but still I think that robbing the RBI and like institutions of their autonomy could lead to disaster. Encroachment on the central bank's independence will not only lower its credibility and accountability but it will also lead to monetary decisions driven by politics. Growth does not solely depend on monetary policy and it could come from a number of other measures, which have been long-awaited and are yet to come. Instead of continually taking on the RBI, the Centre should strive for a reconciliation mechanism to achieve a balance between promoting growth and targeting inflation.

I invite your opinions.