Paving the way for a major shift in the interest rate-setting mechanism, the government today named three members for the new Monetary Policy Committee (MPC) who along with RBI nominees will now review rates with an aim to contain retail inflation within targeted 4 per cent.
While a senior finance ministry official said the government will maintain an arm's length from the panel, the new mechanism will still mark a significant departure from the current system of the RBI Governor having powers to take a final call on review of rates irrespective of the advice from the existing Technical Advisory Committee.
The Governor will head the new six-member MPC and will also have the casting vote in case of a tie in the new system.
"We wanted that the government nominees should have an arm's length distance from the government. It would set a healthy precedent," the official said.
The government nominees on MPC headed by RBI Governor Urjit Patel are Chetan Ghate, professor at the Indian Statistical Institute; Pami Dua, Director Delhi School of Economics and Ravindra H Dholakia, professor at IIM-Ahmedabad.
The Appointments Committee of the Cabinet (ACC) cleared the three eminent experts as members on MPC for a period of four years, a government notice said.
RBI nominees are governor, a deputy governor and one more representative from the central bank.
Ghate was part of a five-member technical advisory committee that provided advice on interest rates to the RBI Governor ahead of each policy review.
RBI's fourth bi-monthly monetary policy review for 2016-17 is scheduled on October 4, and interest rate decision is expected to be taken by the panel instead of the current practice of RBI Governor alone.
MPC was set up by amending the Reserve Bank of India Act, 1934, through the Finance Act 2016.
It will work with regard to setting up interest rate to meet the inflation target fixed by the government.
Under the agreement with the government, RBI is committed to anchoring retail inflation at 4 per cent (plus/minus 2 per cent) and has set itself a target of 5 per cent by next March as part of a 'glide path' to achieving the median mark.
As per the norms for MPC, each member shall have one vote and in case of a tie, the RBI Governor shall have a casting vote. Presently, the Governor has over-riding powers to accept or reject the recommendation of RBI's panel on monetary policy.
The Governor will have a casting vote once the country shifts to the panel system.
Members of MPC will be appointed for a period of four years and shall not be eligible for reappointment.
The idea of setting up an MPC was mooted by an RBI-appointed committee led by then deputy governor Urjit Patel in February 2014. It had recommended a five-member committee where three members would be from RBI and two external members would be appointed by the RBI governor and the deputy governor in-charge.
It was also suggested that the governor should have a casting vote in case of a tie.
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