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
- RBI Governor as Chairman
- Deputy governor as Vice Chairman
- 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
- Will be an expert in the field of economic or bank or finance ormonetary policy
- Appoint for a period of 4 years
- 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
- Whether the member would be having a full time job
- 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.