Sources say Finance Minister Arun Jaitley and Reserve Bank of India Governor Raghuram Rajan have agreed to a model of the proposed monetary policy committee (MPC).
Finance Minister Arun Jaitley and Reserve Bank of India Governor Raghuram Rajan have agreed to a model of the proposed monetary policy committee (MPC).
Sources tell CNBC-TV18 that the committee will be constituted by seven members – three representatives from RBI, including the governor, and three representatives from the government.
There will also be a government nominee who will not have any voting rights. The nominee’s job would be to carry the voice of the government before any decision on interest rates is taken by panel.
The decision by the committee will be taken on a majority vote but in case of tie, the RBI governor will have a casting vote. The RBI governor will not have any veto power in the MPC, meaning he cannot go against a majority decision arrived at by the committee.
The MPC is an idea that was first floated a financial reforms-focused committee headed by Justice Srikrishna and will replace the current structure of monetary policy formation in the country in which the RBI chief has the final say on interest rate decisions .(Currently, the RBI does have a technical advisory committee but the RBI governor is free to against its recommendations).
The objectives of the panel will be make policy keeping in mind an inflation target based on the consumer price index (CPI) numbers as well as to manage growth.
The inflation target will be fixed by the government in consultation with RBI, sources said.
The issue came under public attention recently after a draft constituted by the government had proposed a draft that did not offer a veto for the RBI governor. Critics attacked the move saying that a seven-member MPC dominated by the government would effectively take away monetary policy making powers from the RBI.
However, six voting members and a casting vote in the hands of governor will likely tilt the balance back in favour of the central bank.
The Finance Minister will have a Cabinet note approved on this and a bill to constitute an MPC is likely to be constituted in the Winter session of Parliament.