RBI keeps key rates unchanged; Governor signals truce with Centre

New Delhi :Signaling truce with the government over who should decide interest rates, RBI Governor Raghuram Rajan today appeared to favour doing away with the veto power of the central bank chief, arguing it would be better for a committee to decide the key rate rather than one individual.

He further said that while the details of the monetary policy committee (MPC) will have to be ironed out, “there are no differences between RBI and the government” on this matter.

“Currently, the situation is governor has a veto, that is, effectively all advice is only advice and ultimately decision is Governor’s. So, if we continue to retain a veto, it doesn’t change the current situation. It maintains the status quo. That is something to keep in mind,” Rajan told reporters here.

The revised draft of the Indian Financial Code (IFC) as released by the Finance Ministry last month had suggested doing away with this veto power and wants the seven-member MPC to take decisions by a majority vote. Of the seven members, four would be government nominees and the rest from RBI.

Listing out “three virtues” of taking the monetary policy decision away from the Governor and giving it to a committee, Rajan said that when a committee decides on rates, it lessens the pressure on individual and also ensures continuity in policy when any single member of a committee changes.

“A committee can represent different view points and study shows that its decisions are typically better than an individual.

Second, spreading the responsibility of the decision can reduce internal and external pressure that falls on an individual. Third, a committee will ensure broad monetary policy continuity when any single member, including Governor, changes,” he said.

Under the present system, the Reserve Bank Governor is appointed by the government, but controls monetary policy and has veto power over the existing advisory committee of RBI members and outside appointees that sets rates.

Finance Secretary Rajiv Mehrishi had yesterday said that RBI and the government have reached an agreement on composition of the MPC and it will be disclosed in Parliament. Rebuffing pressure from the government to reduce cost of borrowing, RBI Governor Raghuram Rajan today kept interest rates unchanged, citing a spike in food prices and banks passing on to consumers only less than half of its previous rate cuts.

Rajan, in his third bi-monthly policy of the fiscal, left benchmark lending (repo) rate unchanged at 7.25 per cent as also the cash reserve ratio (CRR) at 4 per cent.

The Reserve Bank of India (RBI) has already reduced the policy rate by a total of 75 basis points, or 0.75 per cent, since January, when it embarked on an easing cycle.

The banks, however, have passed on only 0.3 per cent to borrowers, Rajan said.

“Given that policy action was front-loaded in June, it is prudent to keep the policy rate unchanged at the current juncture while maintaining the accommodative stance of monetary policy,” he added.

The central bank, he said, will look for more room to ease policy rate depending upon fuller transmission of rate cuts by banks, food prices and US Federal Reserve normalisation signs.

A top finance ministry official had yesterday pitched for the fourth interest rate cut this year, saying inflation can not be the sole driving factor in deciding on monetary policy action.

Keeping rates unchanged was driven by RBI not wanting to risk inflation from surging, a poor monsoon and a possible increase in interest rates in the US next month.

RBI said sustained hardening of inflation, excluding food and fuel, is “most worrisome”.

“Significant uncertainty will be resolved in the coming months, including likely persistence of recent inflationary pressures, full monsoon out-turn, as well as possible Federal Reserve actions,” he added.

Inflation projections for January to March 2016 are lower by about 0.2 per cent, he said.

Retaining economy growth forecast at 7.6 per cent for 2015-16, RBI said outlook was improving gradually.

Rajan also said that RBI will announce at least one set of bank licences before end of August.