Differences with govt inherent, RBI must exert autonomy:Ex-Guv

Asking the government and RBI to keep their differences "behind the closed doors", former Governor D Subbarao has said the central bank must prevail when it comes to the monetary policy and any disagreement should not matter as long as it exerts its autonomy.
Subbarao, a career bureaucrat who was Finance Secretary before moving to the central bank, also said the governor should be sensitive to the government's point of view, but at the same time the latter must respect the autonomy of RBI.
Subbarao, whose just-released tell-all memoir about his days as RBI governor between 2008 and 2013 lists several instances of differences between the government and the central bank, including on interest rates, also opined that the new framework for setting rates through the Monetary Policy Committee (MPC) might enhance Reserve Bank's autonomy.

In an interview, Subbarao told PTI that such differences would always remain as governments in a democracy are driven by election cycles and therefore give priority to growth over inflation, while the central banks tend to take a long-term view on price stability that may entail sacrificing growth in the short term.
In the book titled 'Who Moved My Interest Rate', Subbarao has written about many run-ins with the two finance ministers during his tenure at the central bank -- Pranab Mukherjee and P Chidambaram -- while he also credited the latter for pushing his name for the top job at RBI.

Asked about the impact on the functioning of RBI from differences between North Block (where Finance Ministry is housed) and the Mint Road (where RBI is headquartered), the career bureaucrat said, "To the extent that Reserve Bank exerts its autonomy and to the extent that the governor prevails, it won't have an impact on Reserve Bank."

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"They must either reach an agreement or agree to disagree but all those differences should remain behind the closed doors. To the outside world they must project unified view. To the extent of monetary policy, the RBI or the Governor should prevail because that is the domain of the central bank," the former RBI Governor said.

Subbarao, who was RBI Governor from September 5, 2008 to September 4, 2013, has given an insider's account in his book of the dilemmas and quandaries he confronted while leading the central bank through economic and political challenges.
Talking about the new MPC framework reached between the government and his successor at RBI, Raghuram Rajan, for setting the interest rates going forward, Subbarao said it should not dilute the autonomy of the central bank.
"I don't think it (MPC) dilutes the autonomy of the central bank. It could also enhance the autonomy of Reserve Bank because to the extent that you have an MPC and you have an inflation target, it puts greater discipline both on Reserve Bank to deliver on that target and on the Government to leave the RBI free to deliver on that target," he said.

He however added, "I would have liked in the interregnum for Governor to have a veto, instead of abruptly shifting from the Governor as an individual making the interest policy decision today to the MPC collectively making a decision."
Subbarao, who had a trial by fire initiation into central banking during his five-year stint as he assumed office at a time when the 2008 global financial crisis that engulfed the world, said the proposed MPC is not an Indian innovation but has evolved as the best practice of central banking globally.
"More advanced economies and more matured democracies have an MPC system. So that is the way to go forward," said Subbarao who now teaches at the Singapore National University.

Last month, the government notified a law for setting up a broad-based, six-member MPC which will decide the monetary policy, hopefully from the term of the new governor. The Centre has not named the members of the panel, which will have equal members from both the Government and the RBI.
The MPC will set interest rates by majority, with a casting vote for the Governor in the event of a tie. Of the six members, three will be from the RBI-- the Governor, who will be the ex-officio chairperson; a Deputy Governor and an Executive Director.
The other three members will be appointed by the government, on the recommendations of a search-cum-selection committee, which will be headed by the Cabinet Secretary.

Asked whether the proposed MPC would help reduce differences between the two sides, Subbarao said those difference will always be there.
"To some extent difference between the governments and the central bank on growth-inflation matters are inherent. The central banks typically take long term view on attaining and maintaining price stability which might, at times entails sacrificing growth on the short term, whereas Governments, especially governments in democracies, are driven by electoral cycles, and are therefore driven by democratic compulsions.
"So, they give priority to growth over inflation. So, to that extent there are differences which are inherent between the two," Subbarao concluded.