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Finance Minister Arun Jaitley is likely to come out with a detailed statement on a new monetary policy framework in his Budget. The proposed agreement intends to change the formulation of the monetary policy structure and inflation targeting.
Traditionally, monetary policy formulation is the preserve of the Reserve Bank of India.
But, in his Budget last year, Jaitley had announced that it was essential to have a modern monetary policy framework to meet the challenge of an increasingly complex economy.
Initial work on the draft of the agreement is over. “Some formalities are to be completed. Once the draft of the framework is finalised, then an agreement will be signed between the RBI and Finance Ministry,” he said.
This will be the second such agreement. The last one was signed in 1997.
The new system is based on the recommendations given by the FSLRC (Financial Sector Legislative Reforms Commission) and also some inputs from the Urjit Patel Committee and Raghuram Rajan Panel on financial sector reforms.
Last year it was announced that a committee would be constituted to take a call on the policy.
The central bank will implement the policy based on the panel’s recommendations.
A senior government official said that since Jaitley talked about the proposed agreement in his July 10, 2014 Budget speech, he is expected to give a detailed account on it in his forthcoming Budget.
Though, the formulation will entail major reforms, it does not require any legislative action.
While presenting the Mid-Year Economic Review in Parliament during the previous session, the Finance Ministry said that an “agreement on monetary policy between the Central government and RBI is being finalised. RBI’s comments are awaited”.
As recommended by the FSLRC, the committee will comprise the Governor and a Deputy Governor (in charge of monetary policy) as well as five external members and a Central government nominee. The decision will be based on voting by the members.
However, the government nominee will not have voting rights.
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