Reserve Bank of India chief Raghuram Rajan on Tuesday said he was not opposed to the governor’s veto power being taken away to let the proposed Monetary Policy Committee (MPC) take decisions on interest rates.
Listing out the advantages of vesting the powers in the committee, Rajan said a committee can represent different viewpoints.
“Spreading the responsibility for decisions can reduce the external and internal pressures that fall on an individual. A committee will ensure broad monetary policy continuity when any single member, including the Governor, changes,” he said.
Rajan’s statement blunts analyst and media reports which said there was a tussle between the RBI and the government on setting up the MPC.
The controversy was triggered after the draft Indian Financial Code, released for public discussion on July 23, stated that the Centre will have the right to appoint four members to the seven-member MPC and take away the governor’s veto power on monetary policy changes.
On Monday, Finance Ministry officials said there was no attempt to clip the wings of the RBI Governor as the draft code was only a discussion paper.
In broad agreement Rajan, however, threw his weight behind the proposed move, saying he supported shifting power to the new panel. “If we continue to retain a veto, it doesn’t change the current situation and maintains the status quo,” he said, adding that the RBI and the government have arrived at a consensus on the contours of the new committee.
“We have been supporters of this committee. The government and the RBI have reached a broad consensus on what the committee should look like and what the role of the governor will be,” Rajan said without disclosing details.
The decision to appoint the MPC was announced earlier this year by Finance Minister Arun Jaitley. The new regime is based on the recommendations of the Financial Sector Legislative Reforms Commission and the Urjit Patel Committee, along with inputs from the Rajan Panel on Financial Sector Reforms. Rajan said the focus was to ensure continuity in policy as the market attempts to understand the voting patterns of new MPC members. “The government has the right to give directions to the RBI and tell it what it should do. There is such a clause in the RBI Act. But that direction has never been given in the history of the RBI. So you have to distinguish what is de jure (by law) and what is de facto (in reality) and I think de facto , the RBI is independent,” Rajan said.