RBI Watch Monetary Policy 2014-15
Yesterday’s blog referred to the February 20 agreement
between the government and Reserve Bank of India, where RBI has a target to keep inflation at the
4% level with a band of +/- 2%. The two page Agreement on Monetary PolicyFramework between the government and RBI is compulsory
reading – for students of economics, voting citizens of India, foreign
investors and firms.
As with any agreement, what is perhaps just as important is
what it does not say. I leave it the readers to make their own judgement and
interpretations. From my side, I would have liked to have a sentence which
stated that “the government on its part will take necessary measures to support
RBI’s inflation target”. Please read my blog of October 22, 2014 to put this in
context.
A noteworthy feature of the MPF is how much time the RBI
gets before the government and the public can say that RBI has failed in
achieving its target: a level of inflation outside the 6% to 2% range for three
consecutive quarters (I am presuming the condition is not three consecutive quarters
in a financial year, although one could interpret the agreement to mean just
that). This gives considerable latitude to the RBI. I would have preferred a
shorter time frame of two consecutive quarters.
The MPF will see changes. The government and RBI have yet to
decide on the powers and composition of a Monetary Policy Committee led decision
making of the policy rate and other measures that are taken to achieve the
target. Please read my blog of October
22, 2014 on this subject.
As per the agreement, the Governor is responsible in setting
the policy interest rate and other measures to achieve the target, but if he or
she fails then it is the RBI that must come up with an explanation and remedial
measures! Even before the introduction of the MPC, the present system needs to
change – in both cases it should be the RBI.
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