RBI: Need Phased Approach to Monetary Policy Committee System

MUMBAI – India's central bank should move in a phased manner to having a committee to take monetary policy decisions, Reserve Bank of India Governor Duvvuri Subbarao said Monday.  "When our financial markets deepen further, operating procedures improve and monetary transmission becomes more efficient, shifting to a monetary policy committee system becomes a realistic option," Mr. Subbarao said in a speech at a meeting of a central bank governance group in Basel. The speech was posted on the RBI's website.  The RBI governor currently has sole authority to take monetary policy decisions. He consults his four deputy governors, but there is no voting involved and the final decision rests with the central bank chief. A move towards setting up a monetary policy committee with a majority decision deciding the outcome will bring the RBI more in line with international counterparts, including the U.S. Federal Reserve and the Bank of England.  The RBI only consults with a technical advisory committee for monetary policy. The committee comprises of the governor as its chairman, the deputy governor in charge of monetary policy as its vice chairman and the three other deputy governors as members. The committee also has five external members--two of whom are experts from the central board of the RBI while the other three are drawn from a wider pool.  The RBI recently overhauled its monetary policy framework to move to a single independent monetary policy variable--the repurchase rate. The central bank's other main policy rate, the reverse repurchase rate, will now be automatically adjusted one percentage point below the repurchase rate. It has also introduced a Marginal Standing Facility, which banks can access during acute liquidity stress, at a rate of one percentage point above the repo rate.  Mr. Subbarao said some preconditions need to be met before setting up a panel for monetary policy, including giving the central bank legally-backed formal autonomy.  The central bank chief reiterated that inflation-targeting wasn't a feasible option in India.  "[The central bank] cannot escape from the difficult challenge of weighing the growth inflation trade-off in determining its monetary policy stance," he added.