The government is likely to put off till next year the setting up of a Monetary Policy Committee (MPC), which would replace the existing system under which the RBI governor is solely responsible for deciding the repo rate. Under the MPC — there are two models under discussion — the RBI governor may or may not have the veto power.
While both the MPC and the Public Debt Management Agency (PDMA) were to be set up this year, RBI’s concerns forced the government to drop the PDMA proposal. According to finance ministry sources, the plan is to pilot both MPC and PDMA together, as a result of which the former will be delayed.
“What was said (on MPC) in the Budget speech was assuming that PDMA will be done this year,” one source said, adding that government was not keen on having two separate legislations. Discussions are still on between RBI and government to prepare a road map for PDMA and the structure of MPC. These would be finalised by December.
There are two set of recommendations on MPC, one by a panel headed by RBI deputy governor Urjit Patel and another by the Financial Sector Legislative Reforms Commission (FSLRC).
The Patel Committee recommended an MPC that would have three members from RBI — governor, deputy governor and the ED in charge of monetary policy — and the other two to be chosen by the first two. The governor would have the casting vote in case one member is absent. Under this model, the RBI is more in control of any repo rate decision.
FSLRC is in favour of a seven-member committee, two from the RBI and five to be appointed by the government. Of the five, two would be appointed in consultation with RBI and the remaining three solely by the government.
Compared to the Urjit Patel model, the government has more powers under the FSLRC model. Under the FSLRC model, the RBI governor is to have veto powers, but only under extreme circumstances, and a written explanation will have to be given each time the veto is used.
Both PDMA and MPC were based on the recommendations of FSLRC, which suggested a new law for the entire financial sector, restructuring existing regulatory agencies and creating new agencies wherever needed for better governance and accountability.
MPC and PDMA are also part of the Indian Financial Code (IFC), a sector-neutral and principle-based law drafted by the FSLRC for the financial sector, which the government is committed to implement. The draft IFC is likely to be introduced in the December session of Parliament. As approval to IFC could take time, the RBI Act would be amended to give effect to the MPC and PDMA.