Finance Bill paves the way for monetary panel on policy rate
India moved a step closer to a “monetary policy framework”, which will empower a six-member panel monetary policy committee (MPC) chaired by the RBI governor to take decisions on interest rates.Updated: May 05, 2016 23:15 IST
India moved a step closer to a “monetary policy framework”, which will empower a six-member panel monetary policy committee (MPC) chaired by the RBI governor to take decisions on interest rates.
The governor, however, will not enjoy a veto power to overrule the other panel members, but will have a casting vote in case of a tie.
The Finance Bill, 2016, which was passed in the Lok Sabha on Thursday, contained an amendment to the Reserve Bank of India Act of 1934 to give a statutory basis to the monetary policy framework.
Last year, the government and the Reserve Bank of India (RBI) had agreed to adopt a monetary policy framework, which will make taming inflation the primary priority of the central bank’s policy decisions.
“We have drafted the amendment (to the RBI Act) in consultation with the RBI so that inflation is reduced,” finance minister Arun Jaitley said in his hour-long reply to the debate on the Bill.
The MPC will set interest rates to keep retail inflation within targets.
“Inflation targets will be set once every five years,”Jaitley said.
The government will nominate three eminent persons to the MPC. No government official will be nominated to the MPC.
The other three members would be from the RBI with the governor being the ex-officio chairperson. Deputy governor of RBI in charge of the monetary policy will be a member, as also an executive director of the central bank.
At present, the RBI’s Monetary Policy Department (MPD) assists the governor in formulating the monetary policy. Views of all key stakeholders in the economy, advice of the Technical Advisory Committee (TAC) contribute to the process for arriving at the key decision on policy repo rate — the rate at which the central bank lends to banks. The governor, however, has overriding powers to decide on interest rates.
The Finance Bill is expected to be taken up for approval in the Rajya Sabha on Friday.