INDEPENDENCE OF RBI GOVERNOR

GROUP 8

LUCKY RANI MANVIR MAANSHAHIA ABHILASH KULKARNI RAHMAN U’ KHAN1521037 1521036 1521016

Outline• Current scenario and independence of RBI Governor

• Global central banks models of MPC

• Proposed MPC structures by RBI & Central Government

• Changes in drafts over the years

• Views on MPC

• Recommendation

Current Scenario• RBI enjoys absolute independence on managing monetary liquidity,

price stability, exchange rate stability and financial stability

• RBI Governor balances fiscal and monetary policy targets

• RBI as monetary policy regulator

• Technical Advisory Committee (TAC)

• RBI Governor has veto power

• Government interference

Global Monetary Policy Committee Structures US Federal Reserve• In US Federal Open Market Committee (FOMC) sets the Fed funds rate

• 7 board members appointed by President confirmed by senate

• Chairperson & Vice-Chairperson appointed for 4 years

• Governors are appointed for 14 years

• Each member has one vote and work on consensus

Global Monetary Policy Committee Structures Bank of England• MPC has 9 members

• Includes Governor, 3 Deputy Governors and chief economist of the central bank

• Rest 4 members are appointed by UK’s Chancellor• Each member has one vote

Global Monetary Policy Committee Structures European Central Bank (ECB)• 6 executive council members & 19 representatives from different states

• Board members have permanent votes while members vote is rotated

• In total 21 voting members on governing council

• Mostly works on consensus than on vote

Proposed MPC Structures

Source: indianexpress.com/article/india/india-others/monetary-policy-committee-will-the-reserve-bank-governor-have-the-last-say/

Proposed MPC Structures

Source: indianexpress.com/article/india/india-others/monetary-policy-committee-will-the-reserve-bank-governor-have-the-last-say/

Proposed MPC Structures

Source: indianexpress.com/article/india/india-others/monetary-policy-committee-will-the-reserve-bank-governor-have-the-last-say/

Views on MPC• Dr D Subbarao, former governor of the RBI, and currently a

distinguished fellow at the National University of Singapore, says a monetary policy committee will add value to decision-making by bringing wider perspectives and making the monetary policy decision more contestable.• Usha Thorat, former deputy governor of the RBI, says under the

present system, there is no scope for monetary policy decision making committee and therefore if you need that you do have to have a legal change.

Source: moneycontrol.com

Views on MPC• Moving to the new model would severely dent the RBI's competency:

Credibility would be lower, politics would drive decisions, and transparency would be reduced," Moody's said.• We have been enthusiastic supporters of the idea of the committee,” said

Mr. Rajan• Having a committee would make it easier for individuals to resist pressure

and ensure that “monetary policy doesn’t change overnight” if one person drops out, Rajan said.• “We also need a transition path from where we are now to that committee,”

Rajan saidSource: livemint.com, articles.economictimes.indiatimes.com

Recommendation• Owing to the assorted factors falling outside the policy controls

there’s an urgent need for an action plan• A Monetary Policy Committee will help overcoming the challenges

being faced by RBI• According to our analysis, formation of a Monetary Policy Committee

(MPC) is a positive step towards growth• It will improve the relationship between the fiscal and monetary

bosses which will further improve decision making process

Recommended Structure of MPC• A seven member Monetary Policy Committee (MPC)• 3 members from RBI including

RBI Governor Deputy Governor (Monetary Policy)Executive Director of RBI

• 1 Outsider appointed by RBI • 3 members appointed by Central Government • Each will have one vote • Governor will have veto in exceptional cases and casting vote in case of a tie• Committee will work on consensus

THANK YOU

SOURCES