New panel may set interest rate in next monetary policy

An agreement for a monetary policy framework was signed between RBI and finance ministry in January last year

The government has initiated the process of constituting a monetary policy committee (MPC), bringing into force the relevant amendments in the Reserve Bank of India (RBI) Act from Monday, the finance ministry stated.

Rules governing the procedure for selection of members of and terms and conditions of their appointment and factors constituting failure to meet the inflation target under the MPC framework were notified, it said. However, at the time of going to print, the changes had not been notified on the Gazette of India website. Nor had the RBI Act on the central bank’s website been changed.

KEY TAKEAWAYS

• The govt, on Monday, notified the rules for setting up of the Reserve Bank of India’s monetary policy committee (MPC), giving effect to amendments to the RBI Act
• Govt notifies rules governing selection of MPC members
• MPC to have six members, headed by a governor
• All members to have one vote
• Governor to have casting vote, in case of a tie
• MPC to meet four times a year

The MPC will decide the benchmark interest rates, which have so far been decided by the RBI governor.

After long disagreements on the MPC composition between the ministry and RBI, it had finally been agreed that it would have six members. The governor will head the panel. Three members, including the governor, will be from the RBI. They will be a deputy governor and an executive director.

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.

Each MPC member will have one vote, with the governor having an additional vote in case of a tie.

“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 four years and shall not be eligible for re-appointment. The meetings shall be held at least four times a year and it shall publicise its decisions after each such meeting,” went the statement.

Additionally, and as reported earlier, RBI will publish a monetary policy report every six months, with forecasts of inflation for between six and 18 months. If RBI fails to meet the inflation target, it will provide reasons, remedial actions and the estimated time within which the target will be achieved.

While the process for appointing the government’s nominees is still ongoing, some media outlets have named economists Chetan Ghate, Errol D’Souza and Ashima Goyal as probable candidates. Senior government sources dismissed these reports as speculation.