India's Central Bank Grows Up
Roiled by fears of a possible conflict with Pakistan, markets in India haven’t been terribly stable in recent days. But at least one source of anxiety has happily been alleviated. Investors are confident that Tuesday’s monetary policy statement from the Reserve Bank of India -- the first since the departure of former governor Raghuram Rajan -- will signal continuity, not change.
In fact, the RBI may be on a much stronger institutional footing now than even under the well-regarded Rajan. This week’s decision is also the first under a new system in which a committee rather than the central bank chief will decide whether to raise, cut or hold steady on rates. The preferences and idiosyncrasies of whoever happens to be RBI governor -- in this case, Rajan’s former deputy Urjit Patel -- matter less than they ever have.
The RBI has used advisory committees in the past, but the final decision was always the governor’s. Now Patel is only one of six members of the new committee; he’ll cast a deciding vote only if there’s a 3-3 deadlock.
Equally importantly, even as India’s central bank has expanded its decision-making processes, it’s narrowed its focus. While earlier the RBI had more than one mandate -- economic growth and development, for example, was considered to be part of its responsibility -- a pact was signed during Rajan’s tenure that reduced the central bank’s targets to just one: consumer price inflation.
There are good reasons to worry about an excessive focus on India’s flawed consumer price index. But narrowing the RBI’s targets while broadening the number of voices shaping policy at least increases the predictability and robustness of monetary policy. And, in mature economies, that’s what produces macroeconomic stability.
India’s government has put to rest other concerns about the end of “governor’s rule,” too. Some critics were dismayed that the government would get to pick half of the new monetary policy committee. Past nominations, especially of regulators, have often proved problematic. Since, unlike in the U.S., India’s Parliament doesn’t approve the executive’s appointments, governments often nominate bureaucrats who can be relied on to toe New Delhi’s line.
India’s profligate finance ministry has never met an interest rate it doesn’t think is too high. And given worries about India’s continuing slump in investment, Prime Minister Narendra Modi had plenty of reason to stack the committee with figures who would reliably have pushed for lower interest rates. If he’d chosen only serving or retired finance ministry officials, it could well have undermined the RBI’s credibility.
Instead, Modi’s three appointees are all academics; there isn’t a bureaucrat among them. Nor did the government rummage around for “safe” economists with links to the ruling party: All three are macroeconomists, from India’s three leading schools of economics. Chetan Ghate is a professor at the Indian Statistical Institute; Pami Dua is director of the Delhi School of Economics; and Ravindra Dholakia is at the Indian Institute of Management in Ahmedabad.
Ghate was already performing a similar job as a member of the RBI’s existing advisory committee; and part of Dua’s remit at the Delhi School of Economics is to examine the sort of real-time economic indicators that the monetary policy committee will need to make their decision on interest rates. Dholakia’s appointment is a bit more of a puzzle, but given that he has served on numerous government committees in the past, he’s hardly an unknown quantity.
So, at least for now, many of the concerns raised by Rajan’s departure have been laid to rest. Patel is a solid successor. The bank has a new and clearer target. And a better and more robust system for deciding rates is now in place. It’s another reminder that strong personalities only really matter in countries with weak institutions -- and that India’s institutions are constantly getting stronger.
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