The government on Monday provided a statutory backing to the monetary policy committee (MPC) by notifying amendments to the Reserve Bank of India Act, 1934. This paves the way for a new monetary policy framework, which shifts the responsibility of maintaining inflation targets and setting of policy rates to a six-member MPC. A committee-based approach to rate setting, compared to the existing practice of the RBI Governor having a final say on policy rates, is expected to make monetary policy decisions more effective.
The idea of a MPC-based approach to monetary policy was originally suggested by the RBI and finance minister Arun Jaitley had announced this in this year’s Budget.
“The government has decided to bring the provisions of amended RBI Act regarding constitution of MPC into force on 27th June, 2016 so that statutory basis of MPC is made effective,” the finance ministry said in a statement on Monday.
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As per a monetary policy framework agreed between the RBI and the government last year, the MPC would aim to contain the consumer price index-based inflation in the range of 4 per cent plus or minus 2 per cent. The MPC will comprise of total six members — three from the RBI while the government will appoint another three members. MPC will set interest rates by majority, with a casting vote for the central bank Governor in the event of a tie.
Officials said the government’s intent is to put in place an MPC by next month, so that monetary policy review scheduled on August 9 could be done by the committee. This will be the last review under the Governorship of Raghuram Rajan, whose three-year term ends on September 4. Rajan has announced plans to join academia at the end of his term as the RBI Governor.
“A committee-based approach will add lot of value and transparency to monetary policy decisions. Out of the six members of MPC, three members will be from the Reserve Bank of India (RBI), including the Governor, who will be the ex-officio chairperson, the Deputy Governor, RBI, and one officer of RBI,” the finance ministry said.
The other three members of MPC will be appointed by the Central government, on the recommendations of a search-cum-selection committee, which will be headed by the Cabinet Secretary, the ministry said. The members to be appointed by the government will be experts in the field of economics or banking or finance or monetary policy and will be appointed for a period of 4 years and shall not be eligible for re-appointment.
The meetings of the MPC shall be held at least 4 times a year and it shall publicise its decisions after each such meeting. Every six months, the RBI will publish the Monetary Policy Report explaining sources of inflation and its forecast for 6-18 months. If the RBI for some reason fails to meet inflation target, it shall give reasons in the report thereof, remedial actions as well as estimated time within which the target will be achieved.
The government had earlier amended the RBI Act by the Finance Act, 2016, to provide for a statutory and institutionalised framework for MPC. The government on Monday also notified the rules governing procedure for selection of MPC, as well as the monetary policy framework.