Reserve Bank Governor Raghuram Rajan today said he was happy about his powers to decide interest rates being shifted to a broader panel, saying the move was in the interest of the economy. A six-member monetary policy committee (MPC), which will include RBI Governor and three nominees of the government, will set interest rates to bring consumer or CPI inflation to pre-set targets.
“The RBI’s inflation-focused monetary framework will be strengthened by the constitution of the monetary policy committee mooted in the Finance Bill,” he said delivering the 1st Ramnath Goenka lecture.
Finance Minister Arun Jaitley in his Budget for 2016-17 announced setting up of MPC by amending the Reserve Bank of India Act, 1934, through the Finance Bill 2016.
“While the RBI Governor will no longer be able to set monetary policy unilaterally, I believe shifting the decision to a committee is in the economy’s interest,” he said.
The panel, he said, will not only “aggregate multiple views better than an individual can, it will offer more continuity, and be less subject to undue pressure.”
Earlier in the day, speaking to reporters after Jaitley addressed the board of RBI about Budget decisions, he praised the composition of the committee saying he was “absolutely on board and happy with it.”
Government will nominate three eminent persons as its nominee members to the MPC.
The remaining three members would be from RBI with the Governor being the ex officio Chairperson. Deputy Governor of RBI in charge of the monetary policy will be a member, so will an Executive Director of the Central bank.
Each member shall have one vote and in case of a tie, the Governor shall have a second or casting vote.
“I believe the monetary reforms of this government will stand out as one of its signal achievements,” he said at the lecture.
At the press briefing, he said, “I think it’s a very reasonable step forward. The monetary process will benefit from this structure. So, I am absolutely on board and happy with it.”
After the Finance Bill 2016 is approved by Parliament, the government will set an inflation target in terms of the Consumer Price Index (CPI) once in every five years, he said.
The inflation target will be decided in consultation with RBI and notified in Official Gazette.
MPC will meet at least four times in a year and the government may, if it considers necessary, convey its views in writing to the MPC from time to time.
RBI will every six months publish Monetary Policy Report explaining the sources of inflation and the forecasts of inflation for the period between six to 18 months.
If RBI fails to meet the inflation target, it shall in the report give reasons for failure, remedial actions as well as estimated time within which the inflation target shall be achieved.