Dr Subbarao backs RBI Guv veto in monetary policy committee

Dr Duvvuri Subbarao, the previous governor of the Reserve Bank of India (RBI), has backed the demand for the central bank chief being given a veto power over interest rate decisions that are proposed to be handed over to a monetary policy committee (MPC).The formation of the monetary policy committee is an idea that was originally recommended by the Srikrishna committee report's Financial Sector Legislative Reforms Commission (FSRLC) a few years ago, but the issue came in focus after the government last week released its own version of the recommendation that insisted upon not keeping a veto for the RBI governor.In an interview with CNBC-TV18, Dr Subbarao, who served as the central bank chief between 2008 and 2013 before giving way to incumbent Raghuram Rajan, said the proposal to not provide veto power to the governor could impact the success of achieving RBI's mandate of keeping inflation under control. "Members appointed by the government tend to owe allegiance to the government and its objective of growth rather than inflation," he told CNBC-TV18's Latha Venkatesh in an interview from Singapore where he currently teaches at a business school. While the government has so far remained tight-lipped on its eventual decision, only saying that it is in consultation with the RBI, its report last week suggested the MPC could comprise of seven members -- three from RBI, four appointed by the government -- and the governor cannot override the decisions of the committee.Dr Rajan, who has always been a vocal backer of the idea of transferring monetary policy decisions from the governor to an MPC, recently appeared to be okay with the idea of not keeping a veto for himself, saying in the presence of a veto, "all advice is only advice".But Subbarao who himself waged a tough battle against inflation in a time of extraordinary global economic events said government nominees in the MPC would be biased towards growth (by being in favour of keeping interest rates low) despite collective accountability for the inflation mandate being put on the MPC.Under Rajan, the RBI has started laying out strict inflation targets -- to keep the consumer price index under 6 percent by March 2016 and bring it below 4 percent by March 2017 -- and Dr Subbarao said that since it is ultimately the governor's responsibility to deliver on inflation, he should have a decisive say on interest rate decisions.Former RBI Deputy Governor Usha Thorat said another challenge would be get people to serve on the MPC."In order to really get the kind of people who are totally without any agenda -- business agenda or any other agenda -- and who are going to be quite objective and are well-informed about the nuances of the monetary theory, linkages between monetary policy, financial stability and fiscal policy [will be difficult]," she said.Subbarao also backed a recent suggestion by former Finance Minister P Chidambaram who suggested the MPC could comprise of six members -- three from RBI and three nominated by government -- and sought a "casting vote" for the governor."Assuming the three internal members vote alike, the governor needs to persuade at least one external member to agree with him, and on most occasions he will," Chidambaram had written in an Indian Express editorial. "In situations where all three external members disagree with the three internal members, it will be a brave governor who will vote, every time, in his own favour to break the tie."Interestingly, it was Chidambaram who, after nudging Subbarao in vain to lower interest rates, had once famously quipped: "If the government has to walk alone to face the challenge of growth, we will walk alone."Subbarao further said the government could experiment with giving veto powers to the RBI chief for a limited time period, say five years, and later decide on whether to stick with it later."The governor's decision should prevail at least in the initial period [following the formation of the MPC]. We must try it out for at least five years with the governor having a veto and then, if we find that the system has stabilised, perhaps we can drag it towards the best practice," he said.