A new monetary policy committee that will move interest rate setting powers from RBI Governor to a broader panel is likely to start functioning by the third quarter, a top finance ministry official said.
The six-member panel, which will include RBI Governor and three nominees of the government, will set interest rates to bring consumer or CPI inflation to pre-set targets.
Setting up of Monetary Policy Committee (MPC) is being done by amending the Reserve Bank of India Act, 1934, through the Finance Bill 2016, Economic Affairs Secretary Shaktikanta Das told PTI in an interview here.
“So once the Bill is passed (in May), the monetary policy committee will be set up thereafter and I would expect around second or third quarter it (MPC) would get operational,” he said.
Three members of the MPC will be nominated by the government, he said adding these would be eminent persons from outside. “No they won’t be government officials,” he said.
The remaining three members would be from RBI with the Governor being the ex officio Chairperson. Deputy Governor of RBI in charge of the monetary policy will be a member, so will an Executive Director of the Central bank.
Each member shall have one vote and in case of a tie, the Governor shall have a second or casting vote, he said.
Another official said the governor will not have a veto power and can only be deciding factor in case of a tie.
Presently, the Governor has overriding powers to accept or reject the recommendation of RBI’s panel on monetary policy.
The government nominees to the MPC will be selected by a Search-cum-Selection Committee under Cabinet Secretary with RBI Governor and Economic Affairs Secretary and three experts in the field of economics or banking or finance or monetary policy as its members.
Asked whether the government nominee would be a bureaucrat, Das said: “Government nominees would be drawn from outside. They won’t be serving government officers. They would be outside experts”.
Members of the MPC will be appointed for a period of four years and shall not be eligible for reappointment.
After the Finance Bill 2016 is approved by Parliament, the government will set an inflation target in terms of the Consumer Price Index (CPI) once in every five years, he said.
The inflation target will be decided in consultation with RBI and notified in Official Gazette.
MPC will meet at least four times in a year and the government may, if it considers necessary, convey its views in writing to the MPC from time to time.
RBI will every six months publish Monetary Policy Report explaining the sources of inflation and the forecasts of inflation for the period between six to 18 months.
If RBI fails to meet the inflation target, it shall in the report give reasons for failure, remedial actions as well as estimated time within which the inflation target shall be achieved.