In a major revamp of the financial sector architecture, the finance ministry on Thursday issued a fresh draft of the Indian Financial Code (IFC) that proposed a monetary policy committee headed by the “chairperson” of the Reserve Bank of India to decide on key interest rates by a majority vote. “Inflation target for each financial year will be determined in terms of the consumer price index by the Central government in consultation with the Reserve Bank every three years,” said the revised draft of the IFC.
Apart from the RBI chairperson, the monetary policy committee (MPC) would consist of five members — one executive member of the Reserve Bank Board nominated by the Reserve Bank Board; one employee of the Reserve Bank nominated by the Reserve Bank chairperson; and four persons appointed by the Central government. The original draft, too, had proposed the MPC, but the RBI chairperson had power to “supersede the decision” of the committee in “exceptional and unusual circumstances” though decisions normally would be taken by the majority vote. In the revised draft, the chairperson does not enjoy any such power but will have the casting vote in case of tie. The RBI and the finance ministry have signed a monetary policy framework agreement earlier this year that would include targeting retail inflation for policy rates and an MPC is expected to be set up — possibly during the course of this year.
At present, the RBI Governor consults a Technical Advisory Committee on policy rates but he can choose to take an independent decision. The revised code has also proposed that the Centre can nominate one representative to attend all the meetings of the MPC and take part in deliberations but will not have a casting vote. Further, the MPC must meet once every two months. The central bank would also be expected to publish a report every two months on the sources of inflation and the forecast for inflation. Further, in case, the inflation target is not met, the RBI would be expected to submit a report to the Central government on the reasons. The revised IFC has been put out by the finance ministry for public comments until August 8. >> Read More