RBI or Government of India: The Owner Of Monetary Policy

If implemented, India will not be the only major economy following this model. It directly emulates the Monetary Policy Committee (MPC) model followed by United Kingdom where Committee members meet for two and a half days every month to decide the official interest rate in the United Kingdom. They are also responsible for directing other aspects of the government's monetary policy framework, such as quantitative easing and forward guidance. The similarity doesn’t end here; the Committee also comprises of eight members along with the Governor of the Bank of England and is responsible primarily for keeping the Consumer Price Index inflation in check, a job it has done commendably well.

On the other hand most many of the other major economies of the world like USA and Japan provides complete autonomy to the central bank while deciding the monetary policy of the country. In US we have the Federal Open Market Committee (FOMC), a committee within the Federal Reserve System (the Fed), which is charged with overseeing the nation's open market operations. Similar is the case with Japan where the Bank of Japan holds similar power and responsibility.

In a fast developing economy like India, there will always be a power tussle between the Central Bank and government on how to exploit the market conditions for optimum growth of the economy. There has always been a healthy respect between RBI and government of India. The difficulty in current system is that it personalizes policies too much. This means you can make mistakes. Committees formed with representation both from the central bank and government would be less prone to mistakes. Where RBI has got the technical qualifications to make all the macroeconomic decisions, the government is the representation of the people representing their aspirations to grow and develop, thus a very vital stakeholder in the RBI’s decision making process. Therefore a tussle between these two institutions for the betterment of the economy may produce some hiccups but the end result would always lead to the betterment of the people.