The governor of Reserve Bank of India Raghuram Rajan has received tactical support of his predecessor even as centre and the RBI are close to an agreement on the broad contours of the Monetary Policy Committee (MPC).

Dr Duvvuri Subbarao, the previous governor of the RBI, has backed the demand for the central bank chief being given a veto power over interest rate decisions that are proposed to be handed over to the MPC. The proposal to not provide veto power to the governor could impact the success of achieving RBI's mandate of keeping inflation under control, he said.

Subbarao further said the government could experiment with giving veto powers to the RBI chief for a limited time period, say five years, and later decide on whether to stick with it later. "The governor's decision should prevail at least in the initial period [following the formation of the MPC]. We must try it out for at least five years with the governor having a veto and then, if we find that the system has stabilised, perhaps we can drag it towards the best practice," he said.

Meanwhile, the proposal now being considered is to have three members from the central bank and three external members with a casting vote for the governor in case there is a tie.

It has been argued that providing a veto power defeats the purpose of such a committee which is supposed to decide on interest rates and a casting vote would be a preferred option as is the case also in many monetary policy committees in other central banks.

The Centre will also consult the RBI while selecting the external members on the committee. This will be a change from the suggestion in the revised draft of the Indian Financial Code or IFC which was released a fortnight ago.

The IFC envisages a seven member MPC with more external members and without any veto power to the RBI chief — which led to widespread criticism, forcing the finance ministry to say that there was no attempt to curtail the powers of the RBI.

The finance ministry has pointed out 18 out of 25 nations which have an inflation targeting regime, decide monetary policy based on a majority vote rather than arriving at a consensus decision, where the governor as chairperson may have a casting vote.

A new MPC will call for changes to the law- the RBI Act as there is no provision in the law now. The finance ministry and the RBI have already signed a monetary policy framework agreement on inflation targets over the medium term.