Monetary Policy Committee: interpreting Governor Rajan’s recent remarks on the power of veto

Rajan should also articulate his views on whether RBI should have majority representation on the MPC

RBI Watch                                                                                    Monetary Policy 2015-16

In the meeting with media, after the release of the bimonthly monetary policy statement on August 4, the first question put to Governor Rajan enquired whether the RBI Governor should have the power of veto or casting vote on the Monetary Policy Committee (MPC), that is being proposed to replace the solely Governor-determined rate setting process currently in place in India.

This is what he had to say: “Currently, the situation is the Governor has the veto, i.e., effectively all advice is only advice; ultimately, the decision is the Governor’s. So if we continue to retain a veto, it does not change the current situation, it maintains the status quo. So that is something to keep in mind.”

Earlier before opening the conference to questions he took time out to speak specifically on the MPC. He made it clear that the RBI is in favour of the committee approach to determining policy and enumerated its many advantages

In an interview with the Economic Times (August 5, 2015), Rajan had this to say: “ Now, if you undermine the committee by insisting that the governor has a veto.... there are places where there is veto for the governor, but it is rarely used. If that's the kind of veto, then that is not a bad thing, but, then, if the veto gets used often, that would be no different from the current system.”

It appears that Rajan is not in favour of the power of veto – certainly not on every occasion the MPC takes a round of votes. It seems he could be in favour of a veto as an exception, e.g. once every financial year. Or is this his way of saying the Governor should have a casting vote?

It is perhaps best not to speculate. Let’s wait out the Government’s decision on the MPC.

What about whether the majority of the members of the MPC should be from the RBI? Rajan should articulate his stand on this point. He will enhance his position by doing so, just as he has done by articulating his stand on the committee approach to setting monetary policy.

My views on this are that there should an equal number of members from the RBI and from outside. The Governor should have an additional vote in the event of a tie.