Dr Rajan as Fixer-in-Chief of Fault Lines

So, it’s all settled then, it seems, the question of RBI’s autonomy. On 4 August, Governor Raghuram Rajan declared that India’s central bank and Government have reached a “broad consensus” on how power would be shared within a proposed Monetary Policy Committee—that would include Finance Ministry nominees— for interest rate decisions. Making his stance clear, Rajan says he is not in favour of being India’s sole policy rate setter. “There are at least three virtues of taking the decision away from the Governor and giving it to [a panel],” as he puts it, “First, a committee can represent different viewpoints, and studies show that its decisions are better than an individual’s. Second, spreading the responsibility for a decision can reduce the internal and external pressure that falls on an individual. Third, the policy can ensure continuity when any single member changes.”

Whether the RBI will hold sway over this Committee, however, remains an open question. The share bazaar’s smart money, though, is on its Governor retaining a final vote as a fulcrum to tip a balanced panel his way in case of a rate call that splits it down the middle. This would assure RBI the operational leeway it needs to hit the inflation target set for it by the Centre. The bank’s primary objective, after all, is to keep the rupee credible as a currency and its value stable.

In the West, the case for central bank autonomy has been made over and over. As Janet Yellen, chief of the US Federal Reserve, once said, “The principle that a central bank, charged with controlling inflation, should be independent from the government is unassailable.” Her predecessor, Ben Bernanke, held the same view. “The central bank needs to be able to make policy without short-term political concerns,” he’d said, adding for good measure that, “Most of the policies that support robust economic growth in the long run are outside the province of the central bank.”

Central bank chiefs are usually economists of truly impressive academic accomplishment, but that doesn’t guarantee neutrality in a debate on their own authority. In aid of their point, however, here are the words of John Plender, a columnist of The Financial Times: ‘The aim is to insulate monetary policy from political interference and from electoral pressure to deliver short-term economic growth at the expense of longer-term inflationary cost.’

It’s not an open-and-shut case in the West, though, at least not after the extraordinary measures adopted by the US Fed in response to the Great Recession. As Stephen King has argued, ‘Whether they like it or not, central bankers are being dragged into the political fray. It is not so much an issue of whether independence is good or bad. Rather, monetary policy itself is no longer a job for technocrats.’ A real zero-rate policy to spur an economy, he points out, could let inflation slip out and penalise savers and the salaried alike: ‘While there is a reasonable justification— far better, surely, to squeeze all workers’ wages in real terms than to have a Depression-style rise in unemployment— it is not at all obvious that it is a decision to be made by the high priests of the central banking community alone.’ Central bankers, he concludes, ‘are making decisions that are inherently political. Once politicians recognise this they will surely be tempted to take over the reins. At that point, monetary stability, for good or bad, can no longer be guaranteed.’

The RBI, of course, is certainly not pursuing a policy of super- cheap money. If anything, it’s being a little too cautious on inflation. Also, one could argue that Indian politics is especially sensitive to inflation as a scourge. But the principle of keeping the currency and economy safe from the ravages of a fiscally reckless government—if one were to take charge—is a worthy one all the same. And an optimal way to do this, as MIT Professor Stanley Fisher and his PhD student Guy Debelle argued in an academic paper titled ‘How Independent Should a Central Bank Be?’, is to let the bankers do their job: ‘Central banks need to be given a clear mandate and clear incentives to perform, and they must be accountable for their actions.’

That’s still not the end of it. Frustratingly, the Indian economy is peculiar in many ways. To begin with, whether inflation is always a monetary failure—too much cash chasing too little stuff—is not entirely clear, given the country’s choppy supply scenario in sectors such as food. Changes in the RBI’s policy rate often take too long to take effect. And studying all of it is devilishly difficult.

If Rajan finally gets to share his burden, one imagines him sighing a long sigh of relief. And so long as the Governor still has a final say, the rest of us may want to follow suit.

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Aresh Shirali