We have already done a lot internally in the past, in my term and before, to institutionalise the process and having scheduled meetings with different constituencies before the policy decision. Having serious discussions with internal staff based on incoming economic data and based on our model analysis and speaking with the government to obtain its viewpoint.
Reserve Bank of India (RBI) governor Raghuram Rajan announced the third bi-monthly monetary policy where he kept key rates unchanged. The repo rate remains at 7.25% and the CRR at 4.0%.
Rajan said that the hardening of inflation excluding food and fuel is most worrisome. Rajan, in a statement, said, "Some food prices, particularly of protein-rich items, pulses and oilseeds have risen sharply in recent months. They will have to be carefully monitored as they tend to be sticky and impart an upward bias to inflation and inflation expectations. This assumes significance in view of households’ inflation expectations rising again."
However, Rajan also commented on the much debated Monetary Policy Committee (MPC), where the proposals made public say that the RBI governor will not have any veto power. The MPC will decide key rates and the decision of the majority will be binding on the central bank.
Currently, RBI governor is advised by a technical advisory commitee (TAC) but the final decision on the policy rates rest with the governor.
This is what Raghuram Rajan said:
There has been a lot of commentary about the composition of the Monetary Policy Committee. Let me say at the outset that the Reserve Bank believes institutionalising the process of monetary policy formulation is vital, given that the Government has given the Reserve Bank a clear inflation objective.
We have already done a lot internally in the past to institutionalise the process, including having scheduled meetings with different constituencies before the policy decision, having serious discussions with internal staff based on incoming economic data and our models, and speaking with the Government to obtain its viewpoint. The final policy is usually a consensus arrived at by the Governor, the Deputy Governor in charge of monetary policy, and the Executive Director in charge of Monetary Policy, but ultimately the responsibility is that of the Governor's.
Going forward, there are at least three virtues of taking the decision away from the Governor and giving it to a committee.
First, a committee can represent different viewpoints, and studies show that its decisions are typically better than an individual’s;
Second, spreading the responsibility for the decision can reduce the internal and external pressure that falls on an individual; and
Third, a committee will ensure broad monetary policy continuity when any single member, including the Governor, changes.
So we have been enthusiastic supporters of the idea of a committee. Since the Finance Minister’s budget announcement that such a Monetary Policy Committee would be formed, we have been engaged in dialogue with the Government. From the Reserve Bank’s side, we wanted that the structure should ensure continuity in policy as the market attempts to understand the voting patterns of different new MPC members.
I can reiterate the Finance Secretary’s comment yesterday that the Government and the Reserve Bank have reached a broad consensus on what such a committee should look like and what the powers of the Governor might be. While the details have to be ironed out, there are no differences between the Government and the Reserve Bank in this matter.
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 "Raghuram Rajan")
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