Subbarao seeks ‘formal autonomy’ for India’s central bank

10 May 2011

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Reserve Bank of India governor D Subbarao on Monday made a strong pitch for ''formal and law-backed'' autonomy for the central bank to enable it to deal more effectively with monetary issues.

While admitting that the government has so far refrained from interfering in the functioning of RBI, he said its autonomy should be legally formalised.

Although the RBI Act empowers the government to give directions to the central bank in public interest, the centre has thus far not used this power.

Addressing a meeting of the Central Bank Governance Group in Basel, Switzerland, Subbarao also suggested a gradual shift to a committee-based approach to setting interest rates.

He 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 the MPC advices the Bank of England. Similar systems exist in other developed economies, including the US.

"My own view is that we should be moving towards an MPC system, but in a phased manner," Subbarao said. He added that this would become a realistic option with the deepening of financial markets and improvement in operating procedure.

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