Govt, RBI on the same page on monetary policy panel issue, says Rajan
While Rajan stops short of detailing the structure of the MPC, he indicated that he is not opposed to the governor's veto powers being taken away
Mumbai: Reserve Bank of India (RBI) governor Raghuram Rajan on Tuesday said the central bank and the government have reached a broad consensus on the creation of the monetary policy committee (MPC).
While the governor stopped short of detailing the structure of the MPC agreed upon between RBI and the government, he indicated that he is not opposed to the governor’s veto powers being taken away.
“Under the current situation, the governor gets advice but the final decision is his. So essentially, the governor has veto power. If we continue to retain that veto power, it doesn’t change the situation," said Rajan.
Speaking at a press conference after the release of the third bi-monthly monetary policy review, Rajan said RBI has always supported the idea of institutionalizing the process of monetary policy formulation. This is vital, given that RBI now has a clear inflation-targeting mandate, said Rajan.
The governor highlighted the benefits of an MPC, saying that studies indicate that policies set up by a committee tend to be better that those set by a single person. He said a committee-based structure also ensures greater continuity in policy and help mitigate pressure that may fall on a single person responsible for policy setting.
“A committee will ensure broad monetary policy continuity when any single member, including the governor, changes," he added.
In a developing economy which is adopting inflation targeting, it is essential that the monetary policy is charted after a consensus in a group of experts, rather than depending on one person, according to S.K. Ghosh, chief economic adviser, economic research department at State Bank of India.
“We don’t think there was any difference of opinion between the government or the RBI regarding this," Ghosh said.
The government will make the final structure of the MPC public when it is fully comfortable, the governor added.
A revised draft of the Indian Financial Code (IFC) has suggested a seven-member MPC with four members appointed by the government and removal of the governor’s veto power when taking decisions.
Earlier, an a central bank committee headed by deputy governor Urjit Patel had recommended a five-member committee, with three RBI representatives and two external members.
Experts were earlier divided on the revised IFC, with some claiming that having more government nominees in the MPC would erode the central bank’s autonomy, while others thought that this was a welcome change from a system which places a lot of responsibility on the RBI governor.
Siddhartha Sanyal, director and chief economist, India, at Barclays Bank Plc., believes that the final structure of the MPC may not necessarily follow all the recommendations of the IFC.
“The final structure of the MPC might be somewhere in the middle of what was initially suggested by the Urjit Patel committee report in 2014 and the recent report by the IFC," Sanyal said.
While RBI prefers the veto power to remain with the governor, the IFC had suggested that the central bank chief should have a second and casting vote in case of a tie.
“At least the power of a decisive casting vote with the governor in case of a divided house looks likely," Sanyal added.
In his post-policy comments, Rajan pointed out that while the government of India has always had the right to give direction to RBI and tell what it should do, under the RBI Act, it has refrained from doing so in the history of the central bank.
“So you have to distinguish between what is de jure and what is de facto and I think de facto the RBI is independent," the governor said.
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