New Panel On Interest Rate No Threat To RBI Autonomy: D Subbarao

Mumbai: The new interest rate setting Monetary Policy Committee (MPC) could enhance the autonomy of the Reserve Bank and will put greater discipline on both the central bank and the government to meet their targets, former RBI Governor D Subbarao has said.

"I don't think it (MPC) dilutes the autonomy of the central bank. It could also enhance the autonomy of the Reserve Bank because to the extent that you have an MPC and you have an inflation target, it puts greater discipline both on Reserve Bank to deliver on that target and on the Government to leave the RBI free to deliver on that target," Mr Subbarao told PTI in an interview here this evening.

He, however, was quick to add "I would have liked in the interregnum for a Governor to have a veto, so that instead of abruptly shifting from the Governor as an individual making the interest policy decision today to the MPC collectively making a decision."

Mr Subbarao, who had a trial by fire initiation into central banking during his five-year stint at the Mint Road - within a fortnight of his office began the 2008 global financial crisis that engulfed the world -- said the proposed MPC is not an Indian innovation but has evolved as the best practice of central banking globally.

"More advanced economies, more matured democracies have an MPC system. So that's the way to go forward," Mr Subbarao who now teaches at the Singapore National University, said.

Last month, the Government notified a law for setting up a broad-based, 6-member MPC which will decide the monetary policy, hopefully from the term of the new governor. The Centre has not named the members of the panel, which will have equal members from both the Government and the RBI.

The MPC will set interest rates by majority, with a casting vote for the Governor in the event of a tie. Of the six members, three will be from the RBI-- the Governor, who will be the ex-officio chairperson; a Deputy Governor and an Executive Director.

The other three members will be appointed by the Government, on the recommendations of a search-cum-selection committee, which will be headed by the Cabinet Secretary.

The former RBI Governor has just released his book, 'Who Moved My Interest Rate', which talks about his five-year period at the Mint Road. He was the Governor from September 5, 2008 to September 4, 2013.

The tell-all book gives an insider's account of the dilemmas and quandaries Mr Subbarao confronted while leading the RBI through economic and political challenges. 

In the memoir, Subbarao delineates the many run-ins he had with his two bosses -- Finance Ministers Pranab Mukherjee and P Chidambaram -- he credits the latter for pushing his name to the top job at the central bank.

Asked about whether the differences between North Block (Finance Ministry) and the Mint Road has an impact on the RBI, he said "to the extent that the Reserve Bank exerts it's autonomy and to the extent that the Governor prevails, it won't have an impact on the Reserve Bank."

"But it does send confusing signals to the market to the extent if they perceive that there are differences between the Government and the RBI," said Mr Subbarao, who was criticised in the beginning of his term for being too closely working with the Government.

The retired IAS officer said the RBI and the Government should be free and frank in discussing the issues and their differences should be within the closed doors.

"They must either reach an agreement or agree to disagree but all those differences should remain behind the closed doors. To the outside world they must project unified view. To the extent of monetary policy, the RBI or the Governor should prevail because that is the domain of the central bank."

Subbarao, a former Finance Secretary, was quick to add that the Governor should also be sensitive to the Government's point of view and at the same time, the latter must respect the autonomy of the central bank.

Asked whether the proposed MPC would help reduce differences between the two sides, the career bureaucrat said those difference will always be there.

"To some extent difference between the Governments and the central bank on growth-inflation matters are inherent. The central banks typically take long term view on attaining and maintaining price stability which might, at times entails sacrificing growth on the short term, whereas Governments, especially governments in democracies, are driven by electoral cycles, and are therefore driven by democratic compulsions.

"So, they give priority to growth over inflation. So, to that extent there are differences which are inherent between the two," Subbarao concluded.

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