Rajan favours removing RBI Guv veto power on deciding rates

Signaling truce with the government over who should decide interest rates, RBI Governor Raghuram Rajan today appeared to favour doing away with the veto power of the central bank chief, arguing it would be better for a committee to decide the key rate rather than one individual.

He further said that while the details of the monetary policy committee (MPC) will have to be ironed out, "there are no differences between RBI and the government" on this matter.
"Currently, the situation is 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 told reporters here.

The 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. Of the seven members, four would be government nominees and the rest from RBI.

Listing out "three virtues" of taking the monetary policy decision away from the Governor and giving it to a committee, Rajan said that when a committee decides on rates, it lessens the pressure on individual and also ensures continuity in policy when any single member of a committee changes.

"A committee can represent different view points and study shows that its decisions are typically better than an individual. 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," he said.

Under the present system, the Reserve Bank Governor is appointed by the government, but controls monetary policy and has veto power over the existing advisory committee of RBI members and outside appointees that sets rates.

Finance Secretary Rajiv Mehrishi had yesterday said that RBI and the government have reached an agreement on composition of the MPC and it will be disclosed in Parliament.
"We are in discussion with RBI Governor, with RBI, in the form and manner of the MPC and in fact, we now have a position which is actually agreed upon, but which I am not going to discuss. It will ultimately be disclosed in Parliament," Mehrishi had said.

Rajan clarified that RBI has been an enthusiastic supporter of the idea of a monetary policy committee following its announcement in 2015-16 Budget. "We have been engaged in a dialogue with the government. From the RBI's side, we wanted to ensure the structure should ensure continuity in policy as the market attempts to understand the voting patterns of new MPC members," he said.

He reiterated Mehrishi's comment that the government and RBI have reached a broad consensus on how such a committee should look like and what the powers of the Governor should be.

"RBI believes institutionalising the process of monetary policy formulation is vital, given that the government has given RBI a clear inflation objective," Rajan said. He, however, refrained from disclosing the structure of the committee and said this will require changes in the RBI Act, besides Parliament approval.

The first version of IFC, as recommended by the Financial Sector Legislative Reforms Commission (FSLRC) over two years ago, in March 2013, had also suggested an MPC to decide on policy rates with a veto power to the central bank chief to overrule majority decision.

However, the Finance Ministry on July 23 put up a revised IFC draft on its website suggesting to do away with the veto power and a seven-member MPC with a majority from the government.