The Centre and the RBI are close to an agreement on the broad contours of the Monetary Policy Committee (MPC) — which will provide a leeway for the governor of the central bank to take a final call on setting interest rates. According to officials aware of the latest round of talks between the finance ministry and the RBI, 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. In his weekly column in The Sunday Express, former finance minister, P Chidambaram had suggested a six member MPC with the deciding vote for the Governor.