GS-3, Uncategorized

LS clears decks for MPC

The Lok Sabha recently approved the Finance Bill 2016 which included an amendment to the RBI Act clipping the central bank governor’s powers to set monetary policy.

  • The amendment made to the RBI Act through the Finance Bill removed the governor’s powers to singularly set monetary policy vesting them in a six-member Monetary Policy Committee.
  • After the Finance Bill is approved by the Rajya Sabha, the process of setting up of the Monetary Policy Committee (MPC) will be set in motion.

About the MPC:

Last year, the government and the Reserve Bank of India (RBI) had agreed to adopt a monetary policy framework, which will make taming inflation the primary priority of the central bank’s policy decisions.

What it does?

The MPC will set interest rates to keep retail inflation within targets. Inflation targets will be set once every five years.

Composition:

The committee will have six members. Of the six members, the government will nominate three. The RBI Governor will chair the committee. The governor, however, will not enjoy a veto power to overrule the other panel members, but will have a casting vote in case of a tie. No government official will be nominated to the MPC.

  • The other three members would be from the RBI with the governor being the ex-officio chairperson. Deputy governor of RBI in charge of the monetary policy will be a member, as also an executive director of the central bank. Decisions will be taken by majority vote with each member having a vote.
  • 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.
  • Members of the MPC will be appointed for a period of four years and shall not be eligible for reappointment

Present scenario:

At present, the RBI’s Monetary Policy Department (MPD) assists the governor in formulating the monetary policy. Views of all key stakeholders in the economy, advice of the Technical Advisory Committee (TAC) contribute to the process for arriving at the key decision on policy repo rate — the rate at which the central bank lends to banks. The governor, however, has overriding powers to decide on interest rates.

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