Reserve Bank Governor Raghuram Rajan today said he was happy about his powers to decide interest rates being shifted to a broader panel, saying the move was in the interest of the economy.
A six-member monetary policy committee (MPC), which will include RBI Governor and three nominees of the government, will set interest rates to bring consumer or CPI inflation to pre-set targets.
"The RBI's inflation-focused monetary framework will be strengthened by the constitution of the monetary policy committee mooted in the Finance Bill," he said delivering the 1st Ramnath Goenka lecture here.
Finance Minister Arun Jaitley in his Budget for 2016-17 announced setting up of MPC by amending the Reserve Bank of India Act, 1934, through the Finance Bill 2016.
"While the RBI Governor will no longer be able to set monetary policy unilaterally, I believe shifting the decision to a committee is in the economy's interest," he said.
The panel, he said, will not only "aggregate multiple views better than an individual can, it will offer more continuity, and be less subject to undue pressure."
Earlier in the day, speaking to reporters after Jaitley addressed the board of RBI about Budget decisions, he praised the composition of the committee saying he was "absolutely on board and happy with it."
Government will nominate three eminent persons as its nominee members to the MPC.
The remaining three members would be from RBI with the Governor being the ex officio Chairperson. Deputy Governor of RBI in charge of the monetary policy will be a member, so will an Executive Director of the Central bank.
Each member shall have one vote and in case of a tie, the Governor shall have a second or casting vote.
"I believe the monetary reforms of this government will stand out as one of its signal achievements," he said at the lecture.
At the press briefing, he said, "I think it's a very reasonable step forward. The monetary process will benefit from this structure. So, I am absolutely on board and happy with it."
After the Finance Bill 2016 is approved by Parliament, the government will set an inflation target in terms of the Consumer Price Index (CPI) once in every five years, he said.
The inflation target will be decided in consultation with RBI and notified in Official Gazette.
MPC will meet at least four times in a year and the government may, if it considers necessary, convey its views in writing to the MPC from time to time.
RBI will every six months publish Monetary Policy Report explaining the sources of inflation and the forecasts of inflation for the period between six to 18 months.
If RBI fails to meet the inflation target, it shall in the report give reasons for failure, remedial actions as well as estimated time within which the inflation target shall be achieved.
To a question on recapitalisation of state-owned banks, Rajan said the amount provided in the Budget is a reasonable sum.
"Of course, the finance minister has added that what was needed was provided. Of course, in this process, we have to be careful that the capital is used properly going forward...," he said.
"You take the combination of capital that the government has made available and what RBI has made available. This will be adequate for the actions that we want to take. But of course, it's difficult to take everything into account."
Ramnath Goenka was a freedom fighter and founder of Indian Express Group, which publishes English daily 'The Indian Express', among other publications.
In the Budget speech, Jaitley had said the government was open to providing more capital than what was announced. The government plans to provide Rs 25,000 next fiscal and Rs 10,000 crore each in 2017-18 and 2018-19.
Jaitley had also proposed consolidation of public sectors banks in the Budget speech.
On mergers of banks, Rajan said certainly there is a rationale for consolidation of some of the banks, but it is a process which is being discussed as it does not "happen overnight".
He is hopeful of finding good candidates for the merger. "Certainly, there is rationale for merging some of the banks. We need as many banks for following a similar strategy as we have," the governor added.
"The whole sorts of partners are going to be involved, the Bank Board Bureau or maybe, a committee. We are taking into account all these things."
On setting up the Public Debt Management Agency (PDMA), Rajan said, "we are still working out the composition".
The government proposes to set up PDMA, an independent office, to manage the Centre's debt. Modelled on independent public debt offices in developed economies like the US and the UK, the separate debt management office will be tasked with selling debt on behalf of the government after taking away such powers from RBI.
Rajan also said linking of small savings rates with market rates is an important factor for transmission of monetary policy action.
Seeking to align interest on small savings with market rates, the government last month announced reduction in interest rate on post office savings of 1-, 2- and 3-year terms, Kisan Vikas Patra (KVP) as well as 5-year recurring deposits effective April 1, 2016.
