RBI seeks law-backed autonomy to deal with monetary issues

Mumbai, May 9 (PTI) The Reserve Bank of India (RBI) today pitched for ''law-backed'' autonomy to be able to deal more effectively with monetary issues. While maintaining that the government has not interfered so far with the Reserve Bank''s functional autonomy, RBI Governor D Subbarao made a case for its "legally-backed formal autonomy" while addressing a meeting of the Central Bank Governance Group in Basel, Switzerland. He also made a case for setting up a Monetary Policy Committee (MPC) to advice RBI on policy issues. Such a system prevails in the UK, where MPC advices the Bank of England. "My own view is that we should be moving towards an MPC system, but in a phased manner", Subbarao said.  He added, however, that as a pre-conditions for shifting to the MPC system, "...the central bank should be given legally-backed, formal autonomy". Shifting to MPC system, Subbarao said, would become a realistic option with the deepening of financial markets and improvement in operating procedure. Although the RBI Act empowers the Government to give directions to the central bank in public interest, the centre has thus far refrained from doing so. RBI has enjoyed functional autonomy, Subbarao said, adding that there has been no instance so far of the Government exercising its reserve powers to issue a directive. On Financial Stability and Development Council (FSDC), the RBI Governor said, "It is important for the Government and the regulators in India to develop conventions and practices which will serve the goal of preserving financial stability without eroding the autonomy of the regulators". The proposed FSDC structure attempts to strike a balance between the government''s objective of ensuring financial stability to reduce the probability of a crisis and the operative arrangements involving the central bank and other regulators. While the Sub-Committee under the RBI Governor is expected to evolve as a more active, hands-on body for managing financial stability in normal times, the FSDC would have a broad oversight and will assume central role in the time of crisis.