Raghuram Rajan Says No War With Government, In Sync on RBI Powers

Reserve Bank Governor Raghuram Rajan on Tuesday sought to downplay the controversy stoked by a draft parliamentary bill that seeks to reduce the central bank's independence to set interest rates.

The draft legislation, published last month for public comments, called for the creation of an interest rate-setting committee; it also removed a reference to the central bank governor's veto power, and permitted the government to appoint more than half of its members.

Dr Rajan today said that the responsibility and decision of setting rates so far is that of RBI governor. (Also read: Raghuram Rajan Keeps Policy Rates on Hold at 7.25%)"

Currently the situation is that the governor has a veto. All advice is only advice, ultimately the decision is the governor's, so if we continue to retain a veto. It doesn't change the current situation, it maintains the status quo," Dr Rajan said. (Read: Government Proposes to Strip RBI Chief of Veto Power on Interest Rate)

He said studies show that a monetary policy panel's decision is better than those of an individual. Spreading the responsibility can reduce external and internal pressure on an individual, Dr Rajan added.

The governor said that the RBI has reached a "broad understanding" with the government on the composition of the monetary policy committee and what the governor's power would be. The new committee should ensure the "structure and continuity" in monetary policy, he added.

Dr Rajan said the government has the right to give directions and tell the central bank what it should do, but that direction has never been given in the history of RBI.

"De facto the RBI is independent," Dr Rajan said.