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RBI Act to be amended for setting up the Monetary Policy Committee

01 Mar 2016 Evaluate

The government has proposed to amend the RBI Act for setting up the Monetary Policy Committee, consisting of six members and headed by Reserve Bank of India (RBI) Governor to fix the benchmark interest rates and inflation targets. Finance Minister Arun Jaitley in his Budget proposals said that 'The RBI Act 1934, is being amended to provide statutory basis for a Monetary Policy Framework and a Monetary Policy Committee through the Finance Bill 2016'. He further said that a committee-based approach will add lot of value and transparency to monetary policy decisions.

As per the proposed bill the Monetary Policy Committee would determine the policy rate required to achieve the retail inflation target, set by the government and the decision of the Committee would be binding on the RBI. The inflation target would be decided by the government, in consultation with the RBI. The target in terms of the Consumer Price Index will be set once in every five years. RBI would be organising at least four meetings of the Committee in a year.

Of the six members, three will be nominated by the government while three others will be from the Reserve Bank, including the Governor. The members from the RBI side would be: Governor, Deputy Governor in charge of Monetary Policy and an officer of the RBI Bank to be nominated by the Central Board. The government-nominated members would be appointed on the recommendations made by Search-cum-Selection Committee. The search committee would consist of Cabinet Secretary (Chairperson), RBI Governor, Economic Affairs Secretary and three experts. The Monetary Policy Committee will take decision based on the majority vote. Each member will have one vote but RBI Governor will get a casting vote in case of equality of votes.

The government last year had proposed to set up the Monetary Policy Committee, which will consist of representatives from the Finance Ministry and RBI, to decide on interest rate. A draft released by the government in July last had suggested doing away with RBI Governor's veto power and proposed a 7-member panel to take rate decisions by a majority vote.

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