Panel, and not just RBI Guv, to fix interest rate

Tribune News Service & PTI

New Delhi, June 27

New committee’s brief

• Monetary Policy Committee will have a mandate to bring retail or consumer price index-based inflation to a preset target; if the RBI, for some reason, fails to meet inflation target, it will give reasons in report thereof
• The committee will set interest rates by majority, with a casting vote for the Reserve Bank of India Governor in the event of a tie

In a sweeping change, the government today enforced a law for setting up a broad-based, six-member committee that is likely to decide on interest rate at the next monetary policy in August, with the RBI Governor having a casting vote in case of a tie.

Under the current system, the Governor has overriding powers to accept or reject the recommendation of the Reserve Bank of India’s panel on monetary policy.

The government has kicked-off the process of setting up a Monetary Policy Committee (MPC), which will take over the job of interest rate setting from the central bank.

(Follow The Tribune on Facebook and Twitter @thetribunechd)

“The government has decided to bring the provisions of the amended RBI Act regarding constitution of MPC into force on June 27, so that the statutory basis of MPC is made effective,” said and official statement.

The MPC will set interest rates by majority, with a casting vote for the central bank Governor in the event of a tie.

Officials said the MPC is likely to be in place by next month and the monetary policy review scheduled on August 9 will be done by the committee. The review will be the last monetary policy of RBI Governor Raghuram Rajan, who completes his three-year term on September 4.

The government said a committee-based approach would add value and transparency to the monetary policy decisions. Out of the six members, three will be from the RBI, including its Governor, who will be the ex-officio chairperson, the Deputy Governor and one other officer.

The other three members will be appointed by the Centre on the recommendations of a committee headed by the Cabinet Secretary. These three will be experts in the field of economics, banking, finance or monetary policy and will be appointed for a period of four years.