After many twists and turns, Monetary Policy Committee to be in place soon

The MPC is expected to be in place before the next monetary policy review by the RBI in August

After initial differences between the Reserve Bank of India (RBI) and the government, a body will finally be set up to fix the  policy rate, which has so far been decided by the central bank governor. The body, called Monetary Policy Committee (MPC), is expected to be in place before the next monetary policy review by the RBI in August.
 
The government has put into effect the relevant amendments in the Reserve Bank of India (RBI) Act from Monday in this regard.

Besides, rules for selecting members of the committee and the situation of failure to meet the inflation target would also be notified to the RBI governor. All members will have one vote, but the governor will have a deciding vote in case of a tie. However, the governor will not have any veto power, as is the case now.
 
The MPC will meet four times a year.


 
Three members, including the governor, will be from the RBI; the others will be a deputy governor and an executive director from the central bank.

The other three members will be nominated by the government after recommendations of a search-cum-selection committee, headed by the Cabinet Secretary. The search panel will also comprise the economic affairs secretary and the RBI governor.

 
The MPC will decide the benchmark interest rates, which have so far been decided by the RBI governor.
 
Besides, the RBI will publish a monetary policy report every six months, with forecasts of inflation for between 6 and 18 months. If the RBI fails to meet the inflation target, it will provide reasons, remedial actions, and the estimated time within which the target will be achieved.

 
An earlier agreement between the government and the RBI has mandated that CPI inflation would be targeted in the range of 4% +/- 2% and if there is any diversion from this, RBI will have to explain the reasons to the government.
 
Earlier in 2015, the Indian Financial Code had proposed the committee should comprise four members from the government and three from RBI, including the governor. This had created sharp differences between the central bank and the government.