‘RBI governor needs autonomy, not veto powers’

In a conciliatory move, RBI Governor Raghuram Rajan on Tuesday seemed willing to concede space on the vexed issue of veto power for the central bank chief and said a "broad consensus" has been reached with the government on contours of the proposed panel for deciding interest rates.

Ever since the government released a revised draft of the Indian Financial Code (IFC) last month, suggesting a 7-member MPC with a majority of government-appointed members and doing away with the veto power to the RBI chief, there has been a raging controversy with concerns being raised on the RBI's autonomy getting compromised.

It has been proposed that the panel would take decisions by a majority vote. Of the seven members, four would be government nominees and the rest from RBI. "RBI believes that <g data-gr-id="68">institutionalising</g> the process of monetary policy formulation is vital, given that the government has given RBI a clear inflation objective," Rajan said.

"If we continue to retain the veto (for Governor), it does not change the situation and maintains the status quo," Rajan said, referring to the current practice where RBI chief can overrule the advice of a Technical Advisory Committee.

He said RBI is a votary of taking decisions away from the Governor to an MPC and also listed "three virtues" such a panel can bring in -- improvement in decision-making due to a cross-section of views, moving away from "internal and external pressures" <g data-gr-id="65">an individual faces</g> in taking decisions, and continuity in policymaking.  "A committee can represent different viewpoints and study shows that its decisions are typically better than an individual.

"Second, spreading the responsibility of the decision can reduce <g data-gr-id="63">internal</g> 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.

Top Finance Ministry functionaries initially sought to disown the proposed move to strip RBI chief of 

the veto power, saying it was based on the suggestions of the Financial Sector Legislative Reforms Commission (FSLRC). However, the FSLRC Chairman and a member later clarified they did not suggest any such move, prompting the top Ministry officials to state that the proposal was based on suggestions on FSLRC proposals.

The Governor, however, batted strongly for RBI's autonomy and said the government has never interfered with the central bank's call even though the statutes give it the power. "I think there has been a healthy respect between the government and the central bank. And the central bank ultimately decides what the course of the monetary policy will be," Rajan <g data-gr-id="72">said,</g> while clarifying that the central bank seeks advice from the government. 

"The government has the right to give directions to RBI and tell it what it should do. There is a clause in the RBI Act. (But) that direction has never been given in the history of RBI. You have to distinguish what is de jure from what is de facto (autonomy). I think de facto, the RBI is independent," he said. In an apparent reference to many of his career bureaucrat predecessors, Rajan said there has not been a precedent of (government interfering) even when such people were heading the RBI.

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.

Rajan also pointed to last Sunday's column by P Chidambaram, in which the former Finance Minister had suggested having a six-member MPC with a deciding vote with the Governor. Rajan clarified that the RBI has been an "enthusiastic supporter" of the idea of a monetary policy committee following its announcement in the 2015-16 Budget and has been discussing the same 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. The first version of IFC, as recommended by the FSLRC in March 2013, had suggested an MPC to decide on policy rates with a veto power to the central bank chief to overrule majority decision. 

The FSLRC report also <g data-gr-id="70">favoured</g> a majority of MPC members from the RBI. 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 majority from the government in a seven-member MPC.

FSLRC Chairman retired Justice BN Srikrishna and commission member M Govinda Rao had disowned the revised IFC as not being their report or their views, but of the government.

"There is a misconception that the revised draft of IFC is a report of FSLRC. But that is not true. The term of the FSLRC ended in 2013," Rao had told PTI while adding that RBI Governor should indeed have a "veto power" in the monetary policy. "Once you assign the responsibility of price stability or inflation targeting to the RBI, it follows from there that the RBI Governor should have full say in deciding the interest rate," Rao added. All this led to the government saying it is neither the view of the FSLRC nor that of the government, but a collation of the public view on the subject.