FinMin moves Cabinet note on monetary policy committee

‘The RBI a very credible institution, nothing will be done in MPC that undermines the role of the RBI’.

By: ENS Economic Bureau | New Delhi | Published: October 24, 2015 12:45 am

The finance ministry said on Friday that it has moved a Cabinet note on setting up the proposed monetary policy committee (MPC), where the Reserve Bank of India is expected to retain its dominant role.

“The government has prepared a Cabinet note on MPC. The RBI is a very credible institution and nothing will be done in MPC composition that undermines the role of RBI,” a senior finance ministry official said here, even as he declined to comment on the composition.

The government has proposed to set up the MPC, comprising representatives from the finance ministry and RBI, to take key decisions on interest rate changes, which is currently the exclusive preserve of the RBI and is decided by the central bank Governor on advice of the technical advisory committee.

As a precursor to the MPC, the government and RBI have already signed a monetary policy framework that has set an inflation target of four per cent. The RBI has to ensure that inflation is pegged at four per cent by 2016-17.

Sources said that seven members are likely to be the part of the committee — three from the RBI and three government nominees —  with the RBI Governor having the casting vote. After approval by the Cabinet, the bill will be introduced in Parliament in the Winter session to make it operational.

The issue has been mired in controversy and uncertainty on the apprehensions that such a committee would undermine the power of the RBI Governor. The revised draft of the Indian Financial Code (IFC), released by the ministry in July, had suggested doing away with RBI Governor’s veto power and proposed a seven-member MPC to take decisions by a majority vote.

According to the proposal, of the seven members, four would be government nominees and the rest from RBI. Under the current system, RBI Governor is appointed by the government, but controls monetary policy and has veto power over the existing advisory committee of RBI members and outside appointees that sets rates.

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