Finance Ministry notified the provisions of the amended Reserve Bank of India Act, 1934 to set up MPC

• Moving a step closer to setting up the Monetary Policy Committee (MPC), the Finance Ministry notified the provisions of the amended Reserve Bank of India Act, 1934.
• Monetary Policy Committee (MPC), is expected to be in place before the next monetary policy review by the RBI in August.

About MPC:

• It is a six member panel and all members will have one vote, but the governor will have a deciding vote in case of a tie. However, the governor will not have any veto power.
• Members of the MPC will be appointed for a period of four years and shall not be eligible for reappointment.
• The MPC will meet four times a year.
• Three members, including the governor, will be from the RBI; the others will be a deputy governor and an executive director from the central bank.
• The other three members will be nominated by the government after recommendations of a search-cum-selection committee, headed by the Cabinet Secretary. The search panel will also comprise the economic affairs secretary and the RBI governor.
• The MPC will decide the benchmark interest rates, which have so far been decided by the RBI governor.
• Besides, the RBI will publish a monetary policy report every six months, with forecasts of inflation for between 6 and 18 months. If the RBI fails to meet the inflation target, it will provide reasons, remedial actions, and the estimated time within which the target will be achieved.
• An earlier agreement between the government and the RBI has mandated that CPI inflation would be targeted in the range of 4% +/- 2% and if there is any diversion from this, RBI will have to explain the reasons to the government.
• As per rules, no member of MPC should have any financial or other interest that prejudicially affects his functions as a member. Also, it will be considered that the panel failed in achieving the inflation target if the lower or the upper range of the target is breached for three consecutive quarters.
• The government has given statutory backing to the monetary policy committee (MPC).

Analysis:

• MPC would minimise the chances of a bad/wrong decision due to the wrong judgment of any one person (the Governor), however well-intentioned he/she may be. This is widely accepted globally and is the reason why most central banks take monetary policy decisions through committees rather than vesting them in the hands of one person.
• Equal number of both government and central bank members could creates a potential situation where the government could dictate monetary policy
• With the introduction of the monetary policy committee, the RBI will follow a system similar to the one followed by most global central banks.
• Heightened public interest and scrutiny of MP decisions and outcomes has propelled a worldwide movement towards a committee based approach to decision making with a view to bringing in greater transparency and accountability in India.
• There is very little to disagree about the desirability of transitioning from the current decision process to that of an MPC, imparting as it does a greater diversity of views, specialised experience and independence of opinion.
• The idea of setting up an MPC was mooted by an RBI-appointed committee led by deputy governor Urjit Patel in February 2014 though that committee had recommended a five-member committee where three members would be from RBI and two external members would be appointed by the RBI governor and the deputy governor in-charge.

By: Vishal