RBI governor’s power, to fix key rates, ends

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Keeping in mind the objective of growth and to maintain price stability the finance ministry has taken a very bold decision. The government has notified an amendment to the RBI Act, which will transfer RBI governor’s powers to decide monetary policy to a six-member panel (Monetary Policy Council or MPC). As per the amendments, the central government shall, in consultation with the Reserve Bank, determine the inflation target in terms of the Consumer Price Index, once in every five years. MPC is likely to be in place by next month. The government feels that a committee-based approach will add a lot of value and transparency to monetary policy decisions.

Under the current system, the Governor has overriding powers to accept or reject the recommendations of the RBI panel on monetary policy. The August 9 monetary policy review will be the last review under the Governorship of Raghuram Rajan. MPC will have three members from RBI – governor, deputy governor and an official and three members appointed by the government among economists or financial experts for a four year term and will not be eligible for re-appointment. The RBI governor, who heads the panel, will have a casting vote in case of a tie. The meetings of the MPC will be held at least four times a year and it will publicise its decisions after each such meeting.

MPC will institutionalise the country’s monetary policy as the government will set the inflation target for the MPC, which will frame a policy to achieve it. The finance ministry plans to notify the inflation target for the next five years after the formation of the committee. The notified inflation target will supersede the inflation target set in the monetary policy framework agreement signed on February 20 last year, though chances are that it is likely to be retained at the same level as specified in last year’s agreement.

The target for the next five years is unlikely to be changed from the 4±2 per cent agreed for years, starting 2016-17 in the monetary policy framework agreement. The monetary policy framework agreement signed between the RBI and the Ministry of Finance in February 2015 had targeted Consumer Price Index (CPI) inflation below 6 per cent by January 2016.

For 2016-17 and subsequent years, the RBI will target CPI inflation at 4 per cent with a band of plus or minus 2 per cent, the agreement stated. The agreement also stated that the RBI shall be seen to have failed to meet the target if inflation is “more than 6 per cent for three consecutive quarters for the financial year 2015-16 and all subsequent years” or “less than 2 per cent for three consecutive quarters in 2016-17 and all subsequent years.”

About the author: IE&M Team

Indian Economy & Market is an Indian media and information platform producing data-backed news and analysis on all the vital elements at the intersection of the economy, stock markets, mutual fund, insurance, commodities, currency, technology, startups and business.

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