Monetary Policy Committee, RBI and Inflation

MPC, RBI and Inflation:

The approach to have a monetary policy Committee (MPC) and making RBI responsible and accountable to contain inflation as targeted by the MPC is a welcome change and perhaps in tune with best international practice. But the success of this approach presumes the composition of the MPC without being represented by the nominees from the Government or having nominees as recommended by the Government. It also presupposes the independence of the RBI to have its policies attuned to reach the inflation target so fixed by the MPC without any interference of the Government and with its active cooperation in framing and implementing fiscal policies to work in complete alignment with monetary policy. The amendment of RBI act has to necessarily make provisions and spell out the methodology as to how RBI can have its autonomy in letter and spirit and how to prevent direct or indirect intervention of the government in RBI’s operations which involve transmission of monetary policy through banks majority of which are owned controlled and dictated by the Government ignoring the presence of the RBI. The monetary policy and fiscal policy should be mutually reinforcing to achieve the inflation target without ignoring growth and monetary stability. Can the Government with its lot of populist political ideologies can really be cooperative with RBI?

 Dr. T.V. Gopalakrishnan