New panel on interest rate no threat to RBI autonomy: D Subbarao

By: | Published: July 25, 2016 11:41 PM

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.

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. (Reuters)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. (Reuters)

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,” 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.”

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,” 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 Subbarao confronted while leading the RBI through economic and political challenges.

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