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  1. New panel likely to set interest rate in next monetary policy

New panel likely to set interest rate in next monetary policy

The government on Monday initiated the process to appoint three members to the six-member monetary policy committee (MPC) that would set interest rate as early as in August, just ahead of completion of the tenure of Reserve Bank of India(RBI) governor Raghuam Rajan.

By: | Updated: June 28, 2016 7:43 AM
The Centre on Monday notified the amendments to the Reserve Bank of India Act, 1934 pertaining to the MPC. With a view to maintaining price stability and keeping in mind the objective of growth, the RBI Act was amended by the Finance Act, 2016 to provide for a statutory and institutionalised framework as against the current system, wherein RBI governor is the decision maker.(AFP)

The Centre on Monday notified the amendments to the Reserve Bank of India Act, 1934 pertaining to the MPC. With a view to maintaining price stability and keeping in mind the objective of growth, the RBI Act was amended by the Finance Act, 2016 to provide for a statutory and institutionalised framework as against the current system, wherein RBI governor is the decision maker.(AFP)

The government on Monday initiated the process to appoint three members to the six-member monetary policy committee (MPC) that would set interest rate as early as in August, just ahead of completion of the tenure of Reserve Bank of India(RBI) governor Raghuam Rajan. The other members of MPC will be from the RBI, including the governor, who will be the ex-officio chairperson, a deputy governor and one officer of RBI. Each member of MPC will have one vote, while the governor will have a casting (extra) vote to break a tie.

“Amendments to RBI Act for MPC & connected Rules notified. One step closer to its formation and operationalisation,” economic affairs secretary Shaktikanta Das tweeted.

The Centre on Monday notified the amendments to the Reserve Bank of India Act, 1934 pertaining to the MPC. With a view to maintaining price stability and keeping in mind the objective of growth, the RBI Act was amended by the Finance Act, 2016 to provide for a statutory and institutionalised framework as against the current system, wherein RBI governor is the decision maker.

The government will try to name the three members in the MPC before the next monetary policy review meeting scheduled on August 9, which will be the last one for Rajan. Rajan’s three-year tenture comes to an end on September 4.

“The other three members of MPC will be appointed by the central government, on the recommendations of a search-cum-selection committee, which will be headed by the Cabinet Secretary,” an official statement said. These three members of MPC will be experts in the field of economics or banking or finance or monetary policy and will be appointed for a period of 4 years and won’t be eligible for re-appointment.

Under the Monetary Policy Framework Agreement signed by the government and the RBI in February 2015, price stability was made the primary objective of monetary policy and a target was set for 6% CPI inflation for FY16 and 4 +/-2% for all subsequent years. (The RBI has since set for itself a more exacting target of 5% by March 2017. It is also stipulated under the MPF that in the event of a failure to sustain the retail inflation at the prescribed levels over three consecutive quarters, the RBI will report to the government on the reasons for the deviation.Consumer Price Index (CPI) inflation rose to 5.76% in May as against 5.47% in April due to increase in prices such as for foods.

The meetings of the MPC shall be held at least 4 times a year and it shall publicise its decisions after each such meeting.

The rules governing the Procedure for Selection of Members of Monetary Policy Committee and Terms and Conditions of their Appointment and factors constituting failure to meet inflation target under the MPC Framework have also been notified.

Every six months, RBI will publish the policy report explaining sources of inflation and its forecast for 6-18 months. If RBI fails to meet inflation target, it shall give reasons in the report thereof, remedial actions as well as estimated time within which the target will be achieved.

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