Finance Minister announced Monetary Policy Committee expected to bring value and transparency to rate-setting decisions.  

The Government amended the RBI Act to hand over the job of monetary policy-making in India to a newly constituted Monetary Policy Committee (MPC) June 27-2016.

Current system of Monetary Policy

• To take its monetary policy decisions based on the multiple indicator approach
• Rate decisions were expected to take into account inflation, growth, employment, banking stability and the need for a stable exchange rate.
• Only Governor sign is required to pass the monetary policy

Under MPC

• Suggested that RBI abandon the multiple indicator approach and make inflation targeting the primary objective of its monetary policy
• Decisions could be made through majority vote
• Both Government and RBI members on the MPC was suggested for accountability

Monetary Policy Committee

• Six member committee is proposed
• Three members from RBI

1. RBI Governor as Chairman
2. Deputy governor as Vice Chairman
3. Executive Director official nominated by the Central Bank

• Other three external members appointed by center on recommendation of selection committee headed by Cabinet Secretary on the condition

1. Will be an expert in the field of economic or bank or finance ormonetary policy
2. Appoint for a period of 4 years
3. Shall not eligible for reappointment

Meetings

• The MPC will meet four times a year
• Will publicise its decision after each meeting

Risk of Conflict

• Criteria for the appointment of various external members

1. Whether the member would be having a full time job
2. Remuneration

• Conflict of interest in the appointment of Executive Director
• Executive Director reports to the Deputy Governor, who does ED’s performance appraisal. This could be difficult for the person to have an independent view.