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Government initiates process to set up monetary policy committee

28 Jun 2016 Evaluate

The government has finally initiated the process of setting up a new monetary policy committee after it notified key amendments to a law governing the Reserve Bank of India. The finance ministry has stated that “The government has decided to bring the provisions of the amended RBI Act regarding constitution of MPC into force on 27 June 2016 so that statutory basis of MPC is made effective.”

The finance ministry has said that according to the monetary policy framework, agreed by RBI and the government last year, the central bank will look to contain inflation within a band of 4% plus/minus 2 percentage points from next year. Under the changes, passed by parliament last month, a six-member monetary policy council will set interest rates by majority, with a casting vote for the central bank governor in the event of a tie. It further stated that a Committee-based approach will add lot of value and transparency to monetary policy decisions.

Out of the six Members of MPC, three Members will be from the Reserve Bank of India, including the Governor, who will be the ex-officio Chairperson, the Deputy Governor, RBI and one officer of RBI. The other three Members of MPC will be appointed by the Central Government, on the recommendations of a Search-cum-Selection Committee, which will be headed by the Cabinet Secretary. These 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 4 years and shall not be eligible for re-appointment. The meetings of the MPC shall be held at least 4 times a year and it shall publicise its decisions after each such meeting.

The government has notified the rules for the procedure for election of members of MPC and what will constitute a failure to meet inflation target under the MPC framework. As per rules, no member of MPC should have any financial or other interest that prejudicially affects his functions as a member. Also, it would be considered that every six months, RBI will publish the policy report explaining sources of inflation and its forecast for 6-18 months .If the panel failed to meet the inflation target, it shall give reasons in the report thereof, remedial actions as well as estimated time within which the target will be achieved.

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