Urjit Patel to be first RBI guv in Monetary Policy Committee regime

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New Delhi | Published: August 21, 2016 6:13:11 AM

The monetary policy making will never be the same in the 81-year-old RBI’s history as incoming governor Urjit Patel takes charge on September 4.

Unlike the incumbent Raghuram Rajan, who will be the last governor to enjoy absolute power to decide on interest rates, Patel will have to take with him five other members in the Monetary Policy Committee (MPC)— two of his colleagues from the central bank and three external members to be appointed by the government. (Reuters)Unlike the incumbent Raghuram Rajan, who will be the last governor to enjoy absolute power to decide on interest rates, Patel will have to take with him five other members in the Monetary Policy Committee (MPC)— two of his colleagues from the central bank and three external members to be appointed by the government. (Reuters)

The monetary policy making will never be the same in the 81-year-old RBI’s history as incoming governor Urjit Patel takes charge on September 4.

Unlike the incumbent Raghuram Rajan, who will be the last governor to enjoy absolute power to decide on interest rates, Patel will have to take with him five other members in the Monetary Policy Committee (MPC)— two of his colleagues from the central bank and three external members to be appointed by the government. Decisions on rates will be taken by majority even as the governor will have an extra vote in case of a tie. This is part of the new monetary policy framework, which was approved by Parliament earlier this year to create an institutional mechanism to achieve price stability through inflation-targeting interest rates.

Under the new framework, the government has formally adopted a consumer price inflation (CPI) target of 4% plus or minus 2% for the period between now and March 31, 2021, sticking to an agreement signed with the RBI in February 2015. It gives statutory backing to the target. It has already kick-started the process to select its three external members in the six-member MPC.

Before MPC structure was firmed up, there were two reports on how its structure should be. One of them was recommended by a RBI panel headed by Patel himself. He had suggested three members from the central bank including governor, who would have a casting vote while two external members to be nominated by RBI in the MPC. A government-appointed panel had suggested giving majority to government appointed members in the committee. The government went for a balanced representation.

The committee-based monetary policy making has become common practice in today’s world, with few exceptions. The size of monetary policy decision-making bodies varies from one in the case of the Reserve Bank of New Zealand, where decisions are taken by the Governor, to 21 voting members in the case of the European Central Bank, which takes decisions by consensus.

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