Setting up of Monetary Policy Committee to help improve policy rates related decision-making

The MPC will have 6 members with 3 each representing the RBI and the government. Earlier there was a wide outcry against government’s proposal to have the power to appoint 4 of the 6 members of the MPC.

Mar 02, 2016 10:03 IST India Infoline News Service

Reserve Bank of India
India will soon have a committee that will be responsible for setting up of key policy rates. Till now, RBI was solely responsible for setting of these rates that have wide ranging impact on the depositors and borrowers.
 
As and when the Monetary Policy Committee (MPC) is established, it will put India in the select group of countries that follow similar committee based system for deciding key policy rates. For setting up of the MPC, the Reserve Bank of India (RBI) Act needs to be amended. Once that is done, the MPC will decide on interest rates as against the current norm of RBI governor having complete control over the same.
 
The MPC will have 6 members with 3 each representing the RBI and the government. Earlier there was a wide outcry against government’s proposal to have the power to appoint 4 of the 6 members of the MPC. Most stakeholders were concerned that government was trying to take away the autonomy of central bank on country’s monetary policy. But it now being clear that committee will have equal number of members representing both sides, it seems that regulator will continue to have a significant say in setting of the policy rates. Though earlier, the advice from the government was taken, it was eventually the sole responsibility of RBI governor to take the final decision.
 
Establishment of MPC is also one of the promises of previous budget that government wants to fulfill. Earlier, the government and the regulator had signed a Monetary Policy Framework Agreement to work together and put in place a flexible mechanism for RBI to target inflation. Once the committee is in place, it will have the power to decide on the monetary policy in line with government’s inflation and growth targets.

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