'Consensus-based system' better for policy rates: NITI Aayog's Arvind Panagariya

Backing the proposed monetary policy committee for deciding the key interest rates, NITI Aayog Vice-Chairman Arvind Panagariya on Tuesday said "consensus-based system" works better.

"I think Federal Reserve System is a good one. Generally the studies quoted say that Veto system does not work, the consensus-based system works better," Panagariya told PTI in an interview when asked about his views on the proposal of setting up a MPC.

When asked about his take on the structure and role of the MPC, the noted economist again stressed: "I prefer a consensus-based system." The government has proposed to set up a MPC, which will consist of representatives from the Finance Ministry and RBI, to decide on interest rate.

The revised draft of the Indian Financial Code (IFC), released by the ministry in July, had suggested doing away with RBI Governor's veto power and proposed a 7-member MPC to take rate decisions by a majority vote.

As per the draft, of the seven members, four would be government nominees and the rest from RBI. 

RBI Governor Raghuram Rajan had also said that it would be better for a committee to decide the key rate rather than one individual. Under the current set-up, the government appoints RBI Governor, who controls the monetary policy and has a final say on the interest rate.

With a view to strengthening the consultative process in monetary policy, RBI had constituted Technical Advisory Committee (TAC) on Monetary Policy in June 2009. The committee include external members. TAC advice is not binding on RBI Governor.