An online discussion forum on the Monetary Policy Committee: You are invited!

Dear Readers,

Hi! I hereby invite you to participate in this online discussion forum on the ” Proposed Composition of the Monetary Policy Committee (MPC) by the FSLRC”.

The issue is the following.

The FSLRC has come up with the recommendation that the MPC should have 7 members: 4 members appointed by the Government and 3 members, including the Governor, from the RBI (which, as you all are aware, are appointed by the Government). Whilst taking a decision on interest rates or any other Monetary Policy issue, the decision will be taken by majority vote. Hence, the current system wherein the RBI Governor takes a stance on his sole discretion will be replaced by a consensus system, where the decision is by majority.

I wrote a satire piece in my column Tweakonomics in the Hindu Business Line on this (Strange Bedfellows: What the RBI and the FTII have in common: ( You can view it at, in which the tone was that 4 Government representatives on a 7 member MPC takes away the autonomy of the RBI. And this is what started a discussion between my friend Amol Agrawal, who, by the way, hosts this wonderful blog, and me…

I then thought that it may be a good idea to share our discussions through the blog and invite your comments/ views/ queries/ perspectives on this issue too.


This is what Amol had to say about my article:

FTII guys surely have an issue at hand but not sure what the fuss on RBI is..No one is taking any autonomy away!! This is how most so called modern central banks with an inflation targeting framework function…i don’t recall any MPC where Governor has so called veto power. And then the Governor himself was part of FSLRC which talked about modernising Indian financial laws..His own committee talked about similar ideas in 2008..

MPC members are going to have a position like Deputy Governors and who else but govt to appoint them? Govt appoints all regulators and MPC members are just that. Even in Bank of England Govt makes the appointments of MPC who also go through a grilling in Parliament..

Infact one should be following debate on what happened at Federal Reserve where regional Fed members are not appointed by the govt. There is a huge controversy on such appointments especially those in NY Fed who are said to be close to markets.

It is sad that currently much of noise on Indian monetary policy is not from the central bank’s perspective but hallowed Governor’s position. Nothing could be further from the truth.

My humble post here:

Also these articles: (you surely dont want this!)


This is my reply to Amol:

Hi Amol! Thank you for the comments. Your “humble” post is extremely well-written and you’ve taken some fairly interesting digs at the “elite” economists 😛

Here is a take on the MPC from my side. And it is a bit of a counter-view to what you are saying.

1. It is not the veto issue, but the composition of the MPC that I find to be restrictive. There is no need for the Governor to have veto powers; as you so RIGHTLY say in your article, no other modern Central Bank has given those kind of powers to their bankers. We have to make the process more democratic and take decisions by consensus. I totally agree with you here. Further, as you say, whether we have 5 or 7 members in the MPC is also a non-issue. Agreed, again. How does it matter?

The Urjit Patel Committee, as you know, had suggested 5 members in the Committee, with the Governor, Dy. Governor and Executive Director (in charge of MP) of the RBI being 3 and 2 other appointees from the Government who are NOT office bearers in the Government, so that no conflict of interest becomes possible. There is no question of a veto and the policy decision will be by majority. This, to my mind, is acceptable.

Not because there are 5 people, but because the composition of the committee is biased towards RBI officers who have the actual responsibility of carrying out the monetary policy directives. In the FSLRC recommendations, the recommendation is to have 4 members that will be “non-RBI”, whereas there will only be 3 RBI officers.

2. Now for the most important point. Unlike many other “modern” Central banks, the RBI has never really received a mandate that its priority responsibility is to control inflation. So the RBI has always walked the tight rope challenge of “managing” inflation, while also supporting growth. In many modern Central Banks, the LEGAL mandate is benchmarking inflation and hence, even if the composition of the Committee is biased towards non-Central Bank representatives, the Committee works pretty smoothly because it HAS to deliver on inflation. The Fed is a case in point. In India, we run the risk of not having the legal and cultural backbone to do this.

I know, I know…the inflation targeting has come in, right? Yes, so the RBI CANNOT allow the inflation to go beyond 6% and below 2%. But if the inflation is say, at 4.5%. Now what should be the interest rate policy? Here, the culture of the policy balance does play a big role. And the culture is already biased towards supporting growth. Needless to say, the composition of the MPC becomes very relevant here.

3. The US Fed too has a 7 out of 12 members are suggested by the President and okayed by the Senate. So, the composition of the FOMC is biased towards the Government. These 7 members are experts from fields such as economics, finance, markets, etc. While the Fed’s decisions affect not only the US, but also ROW, its autonomy has NOT been seen to be its strength area. There are plenty of Banking Surveys that actually rank the Fed MUCH lower than banks (erstwhile) such as Germany and Switzerland and now the ECB, when it comes to an autonomy score. While an autonomy score is worked out using many parameters, excessive Government representation on the FOMC works anti-autonomy. And hence, while the US inflation has always been low, most banking surveys point out to the fact that it could have been lower! US Central Bank has never really delivered a rock solid low inflation environment such as Germany or Switzerland and one of the reasons has been lack of autonomy!

4. It has also been observed that across all countries, banks with higher autonomy always deliver lower inflation rates than banks with lower autonomy, read Government intervention in any format.

5. Finally, the RBI officers are anyway appointed by the Government (as they should be) and enjoy the confidence of the Government. They are mandated now to stick to an inflation target, which is a number that is decided in accordance with the views of the Government. To make the process democratic is also correct, but to set up an MPC with a composition with fewer members from the RBI…don’t you think this is unnecessarily restrictive?

BTW, in all my readings, I rather liked this article written for the layman by Arvind Virmani and I thought you may like it too! The interesting bit is that rather than go on about the debate, there are actual suggestions on a via media process. Do take a look at it:

Whew! What a long comment I wrote there! Do let me know your views.


Here goes Amol again:

Hi Prof,

Thanks for the comments.

I don’t know but I guess all RBI employees are govt employees. What difference does it make if govt nominates MPC officials as well? Somehow there is always this perception that govt makes poor appointments which is not the case with RBI at least. Given the choices facing RBI and Govt, MPC is going to be just another elite club of similar degrees, similar universities people. I don’t see much differences really. Forget difference of opinions.

I mean there is too much noise over RBI matters. And then for all you know nothing really happens. Look at SEBI for instance. There is zero hype and it has done remarkable job in last 25 years, From Harshad Mehta scam of 1992 to today, it has changed the entire equity market game completely. You remove the equity market game from India and India story falls flat too, SEBI hardly gets any credit which I think keeps it going as well.

And guess what, there have been hardly any economists etc driving the game. It has all been incredible team work and no one even knows who runs the show. Why can’t RBI be like this?

You mentioned Bundesbank and SNB in the post. Well one strong reason was that they didn’t really hype things. The hubris didn;t set in barring Bundesbank handling of 1990 reunification and SNB’s 2008 crisis management.

Having said that, I don’t know why we don;t debate a world without central banking? It is a classic central planner running the show and creating havoc with the system. Why can’t banks decide their rates based on their analysis? Just like other firms do in their respective sectors, why can’t banks be allowed to do the same? I mean regulation is fine but why set interest rates? Why should a regulator decide prices?

I have recently started to read free banking ideas and am amazed that this aspect of history has been omitted from all banks (like economic history and history of economic thought has been omitted). We deplore govt but just are made to believe central banks are critical for the system. Whereas, all central banks have come via govt. fiat and are to be questioned just like we do for givt. And for all you know, countries like Canada, Scotland, Australia etc did really well before their central bank came up. Even in India, it is really interesting to note that banking was far more freer than it is today. Banks could come and close as firms do. This is competition for you and 101 of economics.

Seeing the central banks role in recent years and how much their performance depends on luck, I am really sceptical of their roles in economic management. There is nothing more ironical than seeing most econs believing in free markets and don’t want intervention. But somehow believe in their fine tuning powers on being appointed a central banker.

Like Friedman himself said that eh would rather have a computer/machine manage the monetary policy than a person….


And here’s my reply:

Well, Amol..that’s a lot of issues you’ve commented on at a go!

1. I agree with you that Government appointments are not really necessarily bad. The extremely credible appointments to the post of the RBI Governor are themselves pointers to this fact. And hence, I again agree that we’ll in fact get like minded people from like minded schools on the MPC. Having said that, the key question is again philosophical: Are we giving enough autonomy to the Central Bank when we are giving them accountability to adhere to the inflation targets?

2. The second point you’ve mooted is deeper: Why have a Central Bank at all! These arguments are really classic! And while its tempting for a free market supporter like me to say that banks be given freedom to set rates under the “regulation” of a Central Bank, I really think that the Indian market is not yet mature for this. In a way, this is a Rules vs. Discretion debate. I think that discretionary monetary policy is important in a country like India, where there are multiple supply shocks, monsoon vagaries, oil dependencies, high poverty rates and priority sector issues. These create sudden volatilities in the overall business environment and hence, discretionary policy movement does seem to be necessary!


Your Take?

What do you think? If there is an opinion that adds on to the discussion, please do leave a comment! Looking forward!


14 thoughts on “An online discussion forum on the Monetary Policy Committee: You are invited!

  1. While the two of you are quite the stalwarts in your field, my limited half-knowledge of Economics (for which I owe Manasi Phadke everything, almost 😉 ) , does let me feel like I could add my two bits to this:
    So here goes:

    1. I am very much pro-MPC. The RBI governor is a seriously important position. We have had some amazingly intelligent governors till date, and the current one is no exception – in fact, he might also come under the list of the charismatic ones – the badasses like Paul Volcker, who single handedly reversed the Stagflation of late 70s. But there have been many instances in the recent past, where the speculators and the RBI have looked in the opposite direction. I have had my arguemts with Manasi Ma’am in the class as well – the problems of the faltering Indian economy in mid-2012 to 2013 seemed to be hinged a lot on industrial sentiment being down, and there were two policy reviews in a row, where an expected rate cut was not followed through. The view of the RBI (represented solely by the Governor) at the time was that the increase in inflation at the time, would be a much larger absolute effect of a rate cut as oppsoed to industry sentiment picking up. Manasi Ma’am agreed with Mr. Subbarao, and while she was way more quaified then, and still is now, I was still pointing out (in vain) the Economic Times article where the industry sentiment was said to have bottomed out. I was also pointing out, what I had recently learned, that there were a huge amount of inaccuracies involved in calculating real GDP data and the world economy operated a lot on signals and indications that Fed Governors sent each other in their own language. While I would ascribe to predicting the economy better than ma’am, I certainly believe that bringin in counter-points and multiple ideologies into the review system is a good ‘checks-and-balance’ system. The constitution of the MPC is of course a debatable thing, and seeing as how both political and bureaucratic clout is a very real thing in India, I would personally want the committee constituted with a representative from both North Block and RBI in the minority to external ones.

    2. I am almost equally anti-free banking. There are a few really good examples of countries surviving economic crises (Canada and the Great Depression being the best one), but the cold counter-point is that in every case of banking-led crises we have come away with the lesson that ‘maybe a little more regualtion would have been better’, as quoted by Merin Webb in this FT article –
    In addition to this, I am also very curious about what would happen to the global currency market if indvidual currencies became completely deregulated. I seriously wonder, if we individual banking firms working in their own self-interest would get fed-up and want to settle down on the dollar as the currency (just a wild-thought, not thought it through). Also, the only deregulated currenct of the world, the Bitcoin comes to mind as a gruesome example – I remember the crazy up- and downswings the currency took, and the kind of money which people ended up losing in a short amount of time – scary to imagine something like this happening to a ‘too-big-to-fail’ currency. Also, Bitcoin continues to remain the currency of choice for the drugs and arms black-market on places such as the deep-web.

    There. Literally, two bits.


    • Hi Dhvanil!
      As incisive as ever and believe me, it is good to see that! Well Dhvanil, I too agree that we have a mechanism currently that is too person driven and it really needs to be process driven. A counter view is necessary and in fact important. What Arvind Virmani has suggested is that let the MPC have 7 members. The RBI Guv, Deputy Guv. and the Executive Director in charge of monetary policy stay. For the other 4, let the Government draw up a list of people it finds suitable and let the RBI give an informal ranking on the people it could work with. These 4 could then be appointed as the part of the Committee that decides interest rates. This, to my mind, seems acceptable.

      I agree with Amol that Bitcoin is a freak case and hence it would be little out of place to tie it up with presence/ absence of free banking sectors.

      Fond regards

      p.s: Do you really remember all those crazy debates we had in class in the good ole Subbarao vs. Chidambaram times 😛


  2. Thanks Manasi for this. It is humbling to say the least to feature on your blog.

    @ Manasi:
    All in all, CBA is just like an oxymoron to me. Historically, govts set up central banks either to fight wars or get their currency problems right. Whether it was Napoleon or Hamilton, they just wanted a centralised institution for one purpose – give the govt money. Very soon govts realised that if they keep pumping money by themselves they will loose all credibility. So they created a centralised bank and created some illusion that they are autonomous. I mean why will a govt give its currency powers just like that? The major reason for creating fiat currency was not to enable payments/store of value etc but pay govt’s debts! The fiat currency has emerged as a major weapon deadlier than nuclear weapon. And as central banks are kept as guardians of this weapon, one cannot expect any autonomy really. Central banks are pretty much partners in crime..

    So if one looks at a panoramic view of central banking over nearly 370 years (starting with Riksbank in 1668), there are far more cases of abuses. Things like Bundesbank/SNB are just an exception. In both the credit goes to the govts more than the central bank. Even if Bundesbank was under some law to deliver price stability, the laws could have been easily undone.

    In Switzerland, it is their unique political system which has contributed its bit a highly decentralised structure and don’t care much for the central govt. It is actually a country which could have done away the concept of a central bank. But they quickly found out their banking model was a factor for growth and allowed excesses to emerge till they all blew up in 2008.

    Your second point on rules vs discretion; I mean the moment you have a central bank rules is just a joke. Adherence to any rules is just time specific and it us discretion for most of the time. Free banking means neither rules nor discretion. There is just no central bank! And when you suggest several things like poverty, monsoon etc. mean discretion is important, aren’t we suggesting multiple indicator approach? 🙂 And then these conditions are not unique to banking, but apply to other sectors as well. But we allow much more freedom there.

    @Dhvani: Thanks for the comments. Well Free Banking simply means no central bank doing the monetary policy. But seeing the excesses of global finance, we can still have a banking regulator. Just like SEBI does for capital markets, RBI can do for banking. SEBI does not anymore set prices of securities and one should question why RBI (or any central bank) should set interest rates. Bitcoin is a freak case and likely to fail as there is no govt or bank backing it really. I have explained above why fiat currency is so critical to govt’s fortunes. It can never allow things like bitcoin etc to succeed.

    Liked by 1 person

    • Hi Amol!
      Thank you for that detailed reply! Well, I have written a whole blog on why Central Banks may not have totally lost their relevance in India 😛 I am really a bit more old school when it comes to understanding the role of Central Banks. While cases of abuse are absolutely abundant, we also need to consider the fact that the track record of the RBI in India has been very impressive indeed! As I have argued in my blog, if it ain’t broke, don’t fix it!

      I am as usual, very keen to hear your views on this. And I really appreciate all the points you are getting into the debate; it helps create more and more perspectives in my mind. A heartfelt thank you!


      • Well Prof, this is actually more new school than old school on thinking on central banks!
        Central banks are a fairly modern phenomenon with most having come only in the 20th century. It is free banking which is much more old school. Do read thesis of Vera Smith on central banking which is available online.

        As far as RBI’s track record is concerned one reason why abuses are not as rampant is because it has been kept under strict control by the govt for many many years. Somehow our govt has not allowed RBI to grow out of control. The credit again is more to the govt than RBI. Reading of RBI’s history clearly tells you how close the overall association has been. So the talk of so called independence is much overdone. As I say it is oxymoron to an extent.

        I mean look at all the western central banks who have been rated as highly autonomous all these years. Now both they and their govts have eggs on their faces. All the 20-25 years of research on such form of central banking has come to just a nought. We have been unable to question these developments as we have not developed our own thinking on all this. We have been on borrowed clutches of economic thinking for way too long.

        Another point is central banks may be independent to govt but are complete slaves to financial markets. How they have played to galleries all these years is amazing.

        Much of the problem goes down to not teaching history of economics and banking. This has led to all kinds of wrong notions over so called advanced and modern thinking. I used to also have similar thoughts thanks to years of ignorance. it is only due to reading some more history over the last few years, I realise how distorted things have been.


  3. Hello Ma’am,

    As a budding economist and the little I have read and learnt from you in class, I have a tangential take on the above discussion.

    You said “The Urjit Patel Committee, as you know, had suggested 5 members in the Committee, with the Governor, Dy. Governor and Executive Director (in charge of MP) of the RBI being 3 and 2 other appointees from the Government who are NOT office bearers in the Government, so that no conflict of interest becomes possible. There is no question of a veto and the policy decision will be by majority. This, to my mind, is acceptable.”

    I completely agree with the point that you mentioned and Guv said the same thing in the policy review yesterday that opinion of a group of individual is better than one person, therefore having a committee will definitely help India’s monetary policy. BUT, Why have a new committee all together is beyond my understanding? As an MBA student, We learn to optimize things, so what I think is, don’t give rights just to the Guv of RBI, rather give the rights to a committee in the RBI itself, consisting of Guv, 2 or 4 deputy Guvs and as govt wants appoint two more govt non office bearing appointees.

    Also, to take the optimization to next level, why have two more govt appointees, as the Guv is chosen by govt itself(as mentioned by you above). To add to it, let the govt select the deputies too. This completely saves the need for making a new committee. Also, in past 65 years looking at the stability of RBI and India’s growth, we can safely say that the govt has done a phenomenal job in selecting the echelons in RBI.


  4. Hello Ma’am,
    Through my limited knowledge and little amount of reading that I have done on the subject, I find it interesting that both the parties FSLRC and the Govt. is playing a blame game after the controversial recommendations came out in public.

    ( )


    Clearly the brain behind is the Government and this coming from “Modi Sarkar” just after a year of being in power is even more disheartening; Considering that the committee recommendations will be implemented (If it does) only around a year before next year’s general election time (2019) gives a clear picture of whats happening behind the blame game.
    As inflation is one of the major factors in deciding the result of elections and represents sentiments of the masses, government is trying to take it under control so that it can act as a “Brahmastra” and woo voters to remain in power.
    In short,Clipping the RBI’s wings and fooling(by wooing) the middle class. That is Lethal !

    This is what I think might be cooking(currently) behind the scene and I might be wrong because Mr. Narendra Modi is one such person who has enjoyed majority confidence and faith from people of all classes.(including me) but imagine if someday a leftist Party leader such as Mamata Banerjee becomes a PM; then that would be scary !

    I totally support the fact that the representatives of the people(The Govt.) deserves an equal say in these decisions and hence taking all factors into consideration, I found that the second proposed structure for the MPC which is similar to the Israels’s existing system is a good mix from both the sides,

    The Monetary Committee of 6 members:
    3 members of the Committee are representatives of the public ( The Govt.) and 3 members of the RBI but the VETO should be with the RBI Governor.

    That’s my 2 cents.
    Thank you

    (P.S ->Being a politics enthusiast, I realize that maybe I went overboard with some of things but if there’s one thing I have learned about it, its that there is nothing too much in politics :P)


  5. I guess with the holy Governor himself saying that veto powers are not needed, the debate over veto is over. All those who argued for veto thinking they are siding with RBI have been stunned into silence!! Not a comment by the veto camp why this could be wrong which speaks about the quality of debating economics in India.


    • But the debate was never about veto. That a committee is needed was never being disputed. It was the composition of the committee that was under debate!

      From what I read in the papers, the new decision is that the committee will have equal representation. And the independent 3 economists will be suggested by the government and appointed only and only once the RBI approves. No veto needed, casting vote allowed. Makes sense. And that is the only way out of the deadlock. This is exactly what was suggested by Virmani too.

      By the way, very nice article in the ET today on the history of the RBI and why it’s autonomy was sought to be protected but how it is finally a fly in a bottle. As Y V Reddy put it, it’s completely free inside the limits set by the Government.


  6. @ Manasi: The previous comment was for for other commentators. They argued for a veto power. Should have added the @ sign. Still learning these tech things 🙂

    And why just commentators in your post most being your students. There were so many pros who argued for a veto power and are silent over it now. It is amazing.

    I don’t think any composition really matters. These are just bells and whistles and don’t ,necessarily make a software any good. RBI has had experts all these years advising on all matters. MPC is hardly anything new and hardly anything worth the noise.

    I have also argued that one should also look at experience of MPCs in other central banks as well. It is deplorable to say the least. We have spent huge amount of media time talking on how MPCs are composed world-wide. No thought is spared on their overall performance which is so bizarre.

    The performance cannot differ as all come from select schools. I mean why can’t we see the obvious? All central banks are just crowded by people from just a handful of schools in US who study handful of models. That is about it. So, those who think some new and diverse ideas will emerge from MPC are not just deluding themselves but forcing on others too. Students are hardly exposed to either history of economics or history of economic thought to evaluate other ideas.

    I think all of us economics students/followers should read Hayek’s talk. It is titled just apt for economists – The pretence of knowledge (

    I was also living under this pretence for a while as well. And am getting out of it 🙂


    • Hi Amol,

      Wanted to share one more dimension to this whole thing with you. Yesterday, I was talking these issues with Dr. Rajas Parchure @ Gokhale Institute, who is also incidentally associated with the RBI at many levels.
      One thing led to another and we got finally discussing whether money drives GDP in the first place or no! And then, if it does, should it be controlled by a Central Banker. And whether Central Banking independence can be really assured by dynamically inconsistent (Kydland/ Prescott) Governments with short sighted vision. It was an amazing discussion and I thought we can probe into all of these issues more!


  7. @ Manasi: And yes I did read that TCA article and it was in BS. The tagline of the article is: The Reserve Bank of India is not a free agent. It never has been, nor should it ever be

    I did post about it on my blog as well. I have read RBI history especially the initial years and could fully relate to the article. How British actually kept BoE in its powers but wanted RBI to be independent as did not want Nationalist Indians taking control!! There was a huge tussle of power for the central bank given its monopoly privileges. Actually reading history of any central bank (barring Fed), one will question the independence idea.

    Fed story is different as they never wanted a central bank at the first place. They never wanted a central institution managing finances/banking of the country. Two attempts failed in the past and could not go beyond their 20 year charter. They first thought about Fed under a lot of secrecy and then under a lot of pressure. They even gave it a fairly deceptive name like Federal Reserve (not adding things like Bank etc) just to avoid attention. And we still have politicians arguing to end the Fed. There is a lot if history behind all this which is not just fascinating but even stares at your face over the so called modern ideas on central banking.


  8. Hello Madam,

    As one the important objectives of the RBI is to fight inflation, it must have more control over the interest rate lever. Interest rate is RBI’s major weapon and achieving inflation target without control over it could be difficult. Also giving a casting vote in case of a tie would not make much sense as such a situation would rarely occur.
    Also controversies over the modifications in the IFC being forced by the government gives indication of the government trying to undermine RBI’s autonomy. Although the government does have the rights to recommend changes and accept / reject or partially accept the draft but this entire act along with the issue of PDMA seems to point towards the fact that the government trying to reduce RBI’s autonomy.


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