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  1. MPC unlikely during RBI Governor Raghuram Rajan’s term

MPC unlikely during RBI Governor Raghuram Rajan’s term

The MPC, to be headed by the governor, is envisaged to have the power to set interest rates with a view to keeping inflation at the targeted level.

By: | New Delhi | Updated: July 28, 2015 1:17 AM

Although the latest draft of the Indian Financial Code (IFC) sought to dilute the Reserve Bank of India governor’s powers in setting interest rates, finance ministry sources say the present system of the RBI being the decision-maker on monetary policy will likely continue during the tenure of incumbent Raghuram Rajan.

As per the revised draft, which was put up on the finance ministry’s website on July 23, four of the seven members in the proposed Monetary Policy Committee (MPC) would be selected by the Centre. The draft also did away with the earlier suggestion to give the RBI governor veto power in the MPC under exceptional circumstances.

The MPC, to be headed by the governor, is envisaged to have the power to set interest rates with a view to keeping inflation at the targeted level.

Official sources told FE the issues pertaining to the MPC are likely be discussed when Rajan meets finance minister Arun Jaitley for pre-policy consultations on July 31. The next monetary policy review is scheduled for August 4.

The changes proposed in the revised draft of IFC would take one-two years to get implemented and so  the MPC, which would take decisions by majority without any veto power to the governor, would not be in place during Rajan’s tenure, they added.

Rajan assumed office as the 23rd governor of the RBI on September 4, 2013, for a period of three years i.e, till September 3, 2016. The tenure can be extended by two years if the government wishes and Rajan agrees.

As per the Monetary Policy Framework Agreement (MPFA) signed between the the RBI and finance ministry on February 20, 2015, the central bank is  mandated to adopt flexible inflation targeting with the power given to the central bank governor to determine the policy rates.

“The MPFA gives the governor sole power to decide on policy rates and the IFC draft has been  put out for consultations… it will take minimum one-two years before the code is approved by Parliament to implement the MPC,” one source said.

The officials also said the number of government-appointed external members in the MPC can be reduced to less than four proposed in the draft code after consultations with stakeholders. However, the veto power may not be restored to the RBI governor in the MPC, they indicated.

Among the central banks in 34 countries, 33 take decisions by majority while New Zealand gives veto power to its central bank chief, sources said.

Jaitley said a final decision on the MPC would be taken after feedback from the public on the draft, which is open for comments till August 8.

Making of mpc
* The latest draft of the Indian Financial Code does away with the earlier suggestion to give the RBI governor veto power in the MPC under exceptional circumstances
* Issues pertaining to the MPC are likely be discussed when Raghuram Rajan meets finance minister Arun Jaitley for pre-policy consultations on July 31
* Jaitley said a final decision on the MPC would be taken after feedback from the public on the draft, which is open for comments till August 8

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