MPC is likely to have equal representation from RBI and govt-appointed members
The government will introduce a Bill to amend the Reserve Bank of India (RBI) Act latest by February, 2016 to pave the way for a monetary policy committee (MPC) that would set interest rates and vest a new agency with the function of public debt management.
In the present system, the RBI is practically the sole decision-maker as far as interest rates are concerned, although advice from the government is heeded. The finance ministry’s plan, sources said, is to make legislative changes required for the proposed transfer of government debt management from the central bank to an independent public debt management agency (PDMA) and for the formation of an MPC simultaneously.
The setting up of a PDMA would also see the regulation of the government securities market automatically switch from RBI to market regulator Sebi, which regulates all depositories.
Originally, the proposals were announced in the Budget presented in Parliament in February 2015, but finance minister Arun Jaitley had to defer the plan to amend the RBI Act through the Finance Bill to set up the PDMA, as RBI opposed the transfer of the back office to the PDMA.
“Now, a Bill will pilot the proposed changes before next budget,” an official said. The sources said these changes were interlinked and had to be implemented simultaneously.
The creation of the PDMA, it is reckoned, would enable RBI to focus on its core function of monetary policy (flexible inflation-targeting) and regulating banks. Such an agency is also expected to lower the government’s borrowing costs eventually and foster a liquid and efficient G-Secs market. The idea is also to resolve the conflict of interests involved in RBI simultaneously targeting inflation by calibrating interest rates and regulating as well as managing government debt.
The recent controversy over the power of the RBI governor in the proposed MPC and its composition seems to have been put to rest with both the finance ministry and the RBI governor saying that an agreement has been reached between the two.
Though the details of the pact are not yet out, it is likely that the MPC may have equal representation from RBI and of members appointed by the government. The governor may have a casting vote to break a tie, but no veto power.
On August 4, RBI governor Raghuram Rajan said he was not in favour of the governor getting veto power in the MPC.
In the draft Indian Financial Code (IFC) submitted to the finance ministry in March 2013, the Financial Sector Legislative Reforms Commission had proposed the RBI governor could override the MPC under exceptional circumstances, even as the MPC would have two RBI members, two nominated by the government in consultation with RBI and three directly appointed by the government. The new draft released by the ministry recently, however, removed the governor’s veto power and virtually gave majority power to the government by suggesting it could appoint four of the seven members. The ministry later clarified these are merely at a discussion stage and no decision was taken.