RBI wants more say in setting up of Monetary Policy Committee

The Finance Ministry is unlikely to accept the Reserve Bank of India’s stance that it should have complete say in the constitution of the Monetary Policy Committee (MPC).

“The RBI has argued that since the primary responsibility of achieving inflation as targeted lies with it, it should be empowered to constitute the committee,” a senior Government official told BusinessLine .

The committee is critical to the new Monetary Policy Framework Agreement, which aims at inflation targeting, as is prevalent in many developed countries. Once in place, the panel will take a call on the policy, which the RBI will subsequently implement.

Officials fear that differences between the RBI and the Government could delay the formation of the committee.

When contacted, the RBI dismissed the issue as ‘speculative chatter’. An RBI spokesperson said: “The Governor made it clear at the joint press conference with the Finance Minister that details of the committee will be discussed with the government in due course. This is not an issue that is currently on the front burner.”

The RBI and the Finance Ministry had signed the Monetary Policy Framework Agreement on February 20 and this was announced in the Budget. The agreement intends to bring inflation below 6 per cent by January 2016. The target for fiscal 2016-17 and all subsequent years will be 4 per cent, with a band of +/- 2 per cent.

The agreement also said the Governor — and, in his absence, the Deputy Governor (in charge of monetary policy) — will determine the policy rate as well as any other monetary measures, to achieve the target. The inflation in focus here is the Consumer Price Index (CPI) or retail inflation.

Finance Minister Arun Jaitley had said the Government would move to amend the RBI Act this year to form the MPC. But neither the Budget nor the agreement (made public on March 2) gave any details about the MPC.

This new regime is based on the recommendations of the Financial Sector Legislative Reforms Commission and the Urjit Patel Committee, along with inputs from the Rajan Panel on Financial Sector Reforms.

According to the recommendations, the committee will be chaired by the RBI Governor. It will have as members the Deputy Governor (in charge of the monetary policy) and an Executive Director from the RBI as well as two others from outside. The Chief Economic Advisor will be the Government nominee.

According to the official, the Finance Ministry had earlier proposed finalising external members of the MPC through another panel headed by the Cabinet Secretary and with the RBI Governor as a member.

However, the Government is yet to take a call on the formation of the panel, he added.

This is not the first time there has been a delay in legislative action on an arrangement between the RBI and the Government. The Ways and Means Agreement, signed in 1997 with an intention to stop monetisation (printing of currency notes) of deficit and maintaining fiscal discipline, also faced a similar situation.

The ensuing legislation, the Fiscal Responsibility and Budget Management (FRBM) Act, was enacted by Parliament only in 2003 and came into effect from July 2004.

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