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MPC will make rate-setting more credible, independent: Raghuram Rajan

Reserve Bank of India Governor Raghuram Rajan speaks to The Econ

Mumbai : Governor Raghuram Rajan today strongly defended the monetary policy panel and allayed fears that the central bank will become weaker under the new arrangement, saying the new system will instead make the rate-setting process more independent and credible.

“One person can get pressured in one way or other. Past governors have been people of strong integrity and have been independent, but I think it is possible to influence or pressurise or even convince one person. But it’s harder to convince a panel (monetary policy committee or MPC). Therefore, MPC can be a little more independent than a person can be,” Rajan told in a post-policy interaction today.

Ruling out conflict of interest between the government nominees and RBI members in MPC, Rajan said: “The premise that there will be conflicts between the selection commission appointed MPC members and RBI-appointed members is probably unwarranted. I am also a government appointed person and the next Governor will also be appointed by government.”

“I don’t think there is any doubt that neither will the government nominees on the MPC turn out to be toeing the government line, which is the fear being expressed, nor will the RBI representatives toe the Governor’s line so that it becomes a fight between the Governor and the government.

“There will be an attempt to convince each other within the committee. People will be equals on the MPC,” Rajan said, while allaying fears about possibility of RBI getting compromised under the new system.

Stating that the MPC will be a better institution as it will have multiple heads to determine the policy, Rajan said even though today RBI has institutional mechanism, it is largely internal heads. Therefore, under MPC we will get a balance of various views.

Listing out three big positives of the MPC, which he hopes to be in place before he demits office on September 4, Rajan said the biggest advantage is the more degree of independence that the rate-setting will have under MPC, apart from having a better institutional mechanism and continuity in the policy stance and approach.

Raghuram Rajan also said the MPC can end a lot of uncertainty that the present system led by the governor has.
When asked about the possibility of government nominees getting compromised and having conflicts of interest as half MPC members are government nominees, Rajan said such fears are unfounded.

“One person can move off the committee, but it will retain its characteristics and tradition. Therefore, its easier to predict what it can do over the medium-term. Today, one governor moves off and another comes in, and there is a lot of speculation — dovish/hawkish, or which bird he will come to be. There is a lot of uncertainty in the current system than under a panel,” the Governor said.

Stating that he’s been a firm supporter of MPC, Rajan said the only problem we have had with the government over the panel was the transition process, but that has been amicably resolved by “having the governor getting a casting vote.”

When asked going forward will the monetary policy continue to be announced from the Mint Road, Rajan said “the meeting place hasn’t been discussed, but I would think that in all likelihood it would be Mumbai.”

On whether MPC will only be working on the monetary policy, he said “essentially MPC will be directing anything that has a bearing on monetary policy, which could include, apart from interest rates, liquidity measures. Liquidity will be something certainly the MPC will offer its guidance for.”

On the efficacy of the MPC, he said, “I have no doubt that whoever is appointed by the MPC will aim to achieve that as no commission will want to fail in its set objectives.”

When asked how will the MPC ensure the inflation target is met, he said “if the government wanted to violate the inflation framework, it would not have notified the inflation target a week ago. After all the government also benefits through low inflation because it reduces its own interest costs.”

He expressed the hope that the MPC will become an institution of its own and develop a working method or atmosphere which is appropriate and said we should give time to the MPC so that the process of building an institution is achieved.

“Both RBI and government have worked very cooperatively in creating the MPC structure and I don’t think you should start with a premise that there is an inherent conflicts of interests. And that there is full sense of commitment on RBI and government to go ahead and do it as soon as possible,” Rajan concluded.

Earlier in the day, while addressing the press at the customary post-policy meeting, Rajan had said that Michael Patra, the executive director in charge of monetary policy department, will be the third RBI nominee on the MPC after the Governor and deputy governor Urjit Patel. The government is yet to name its three members.

He also said that there was some likelihood that the next decision would be be made by the MPC rather than the Governor.

“If that is the case, there would be six people sitting together and deciding what the path of interest rates will be. I think, we should expect them to take an independent decision and I am sure they will.”


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