Reserve Bank Governor Raghuram Rajan has said the RBI and the government have reached a “broad consensus” about the structure of the proposed Monetary Policy Committee (MPC) that will decide on the interest rate policy.
While Rajan declined to disclose the details of the agreement, it is learnt that the RBI is likely to have an influential say in the MPC while taking decisions on interest rates. If the Governor gives up the veto power, then the RBI may well have an edge on the number of internal members in the panel like in the case of many central banks. If that happens, it could mean four of the seven members weighing in for RBI while three could be nominated by the government. He also referred to the column of P Chidambaram in The Sunday Express, in which the former finance minister had suggested having a six-member MPC with the deciding vote for the Governor. “Let’s await the formal announcement of the committee. This will require changes in the RBI Act … and legislative changes. MPC details will be made public when the government is comfortable,” Rajan said on Tuesday.
“Currently, the situation is the Governor has a veto, that is, effectively all advice is only advice and ultimately decision is Governor’s. So, if we continue to retain a veto, it doesn’t change the current situation. It maintains the status quo. That is something to keep in mind,” Rajan said. “I can reiterate the finance secretary’s comments yesterday (Monday) that the government and the RBI have reached a broad consensus on what such a committee should look like and what the powers of the governor should be.”
Rajan listed “three virtues” of taking the monetary policy decision away from the Governor and assigning it to a committee.
First, when a committee decides on rates, it lowers the pressure on an individual and also ensures continuity in policy when any single member of a committee changes. A committee can represent different view points and studies show that its decisions are typically better than an individual, he said.
Second, spreading the responsibility of the decision can reduce internal and external pressure that falls on an individual. Third, a committee will ensure broad monetary policy continuity when any single member, including Governor, changes.
Currently, the RBI Governor controls monetary policy and has a veto power. He takes advice from the Technical Advisory Committee. dThe revised draft of the Indian Financial Code (IFC) as released by the finance ministry last month had suggested doing away with this veto power and wants the seven-member MPC to take decisions by a majority vote.