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  1. Government toes RBI line on monetary policy committee

Government toes RBI line on monetary policy committee

Ending the suspense over the proposed monetary policy committee (MPC) that will set policy interest rates, the Cabinet will likely soon approve a six-member MPC with three members from the Reserve Bank of India including the governor, who would have a casting vote.

By: | New Delhi | Updated: October 24, 2015 3:38 PM
rbi monetary policy committee

Ending the suspense over the proposed monetary policy committee (MPC) that will set policy interest rates, the Cabinet will likely soon approve a six-member MPC with three members from the Reserve Bank of India including the governor, who would have a casting vote. (Reuters)

Ending the suspense over the proposed monetary policy committee (MPC) that will set policy interest rates, the Cabinet will likely soon approve a six-member MPC with three members from the Reserve Bank of India including the governor, who would have a casting vote.

The other three external members in the committee would be appointed by the government. Besides the six members, a finance ministry nominee would also take part in the deliberations of the committee to convey the government’s views on policy, but he won’t have a voting right. A proposal in this regard has already been circulated for the Cabinet’s approval. A Bill on the MPC may be introduced in the winter session of Parliament in November-December.

The move, along with a decision by the finance ministry to appoint economic affairs secretary Shaktikanta Das on the boards of the RBI and the Securities and Exchange Board of India, is expected to strengthen the government’s ties with financial sector regulators, especially with the central bank. In a surprise move in June, additional economic affairs secretary Rajiv Tyagi was nominated as the department of economic affairs’ representative on the RBI board, replacing then finance secretary Rajiv Mehrishi. In Sebi, the department is currently represented by the joint secretary (capital markets). Official notifications would be issued shortly for these changes.

monetary-policy

The move on the MPC is of significance as it would put to rest a recent controversy after a modified draft floated by the finance ministry had given supremacy in the MPC to the government by suggesting that four of a seven-member committee could be appointed by it. Along with a clarification that it was a mere consultation paper, the ministry had later said that it had reached an understanding on the issue with the central bank.

Setting up of the MPC would fulfill a Budget promise. The government and the RBI signed a Monetary Policy Framework Agreement earlier this year formally mandating the central bank to adopt flexible inflation targeting. Under the present system, the RBI governor is practically the sole decision-maker as far as interest rates are concerned, although advice from the government is heeded. On August 4, governor Raghuram Rajan said he was not in favour of the governor getting veto power in the MPC, adding that there was no disagreement with the government on the issue.

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.

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