RBI Governor Rajan says he isn’t fighting with the Govt. His word will remain the final one on rate cuts

Ever since Finance Minister Arun Jaitley, in his February 2015 budget, announced the formation of a monetary policy committee, many questions were raised over the powers of the Governor of the Reserve Bank of India (RBI), in this case Raghuram Rajan.

Jaitley had announced that a monetary policy committee would be formed, comprising members of the finance ministry,which would include the finance secretary, other government departments and members of the RBI, including the Governor.

So far, the RBI was cautious in reducing the rates by taking into account all factors like retail inflation, WPI, monsoons, etc with the Governor holding the veto power to take the final decision.

The government, on the other hand, backed by a growing out-cry by the cash-dry industry is interested in increasing the GDP of the country, via a greater access to funds for the starved India Inc.

Though the new monetary policy committee will take key decisions like that of interest rate changes, this has raised concerns over the central bank's independence as the government might suggest repo rate changes at regular intervals to maintain easy access to liquidity for the industry.

On Tuesday, Rajan put to rest all speculations and said that the RBI believed in institutionalising the process of monetary policy was essential.

“The committee is a welcome move as the members will represent different views, which will reduce external and internal pressures on an individual. We have been enthusiastic supporters of a committee,” said Rajan.

Rajan said there are no differences between the government and the central bank, adding they have reached a consensus on what the committee should look like and what the powers of the governor should be.

“Retaining veto on policy committee doesn’t change the current situation. Advice is advice but the ultimate decision lies with the governor,” said Rajan.

Rajan, who has often been accused by the industry of being over cautious in his attitude towards a reduction in lending rates, also said, “The government under the law has the right to give directions to the RBI. That direction has never been given since Independence. But it will now happen. However, defacto, the RBI will continue to remain independent.”

The RBI governor said the monetary policy committee will be made public when the government feels comfortable.

It is noteworthy that monetary policy committees are a common feature in central banks globally.

(Image: Indiatimes)