The government and the Central bank have reached a broad consensus on composition of the interest rate setting Monetary Policy Committee (MPC). Reserve Bank of India governor Raghuram Rajan has said that the MPC agreement has been largely done and only fine tuning is left. In order to decide on interest rate, the government has proposed to set up MPC, which will consist of representatives from the Finance Ministry and RBI.
Under the current situation the government appoints RBI Governor, who controls the monetary policy and has veto power over the existing advisory committee of RBI members and outside appointees that sets rates.
Earlier in July, the revised draft of the Indian Financial Code (IFC) was released by the ministry which suggested doing away with RBI Governor's veto power and proposed a 7-member MPC to take rate decisions by a majority vote. Of the seven members, four are proposed to be government nominees and the rest from RBI. Rajan has said the final call on the timing of implementing MPC will be taken by the Finance Ministry but he is not opposed to the governor’s veto powers being taken away.
Highlighting the benefits of an MPC the governor Rajan said that studies indicate that policies set up by a committee tend to be better that those set by a single person. He said a committee-based structure also ensures greater continuity in policy and help mitigate pressure that may fall on a single person responsible for policy setting.