India Insight:One step closer to a monetary policy committee

Monetary policy committee (MPC) set up: The policymakers have beentrying to constitute a Monetary Policy Committee so that the policy raterequired to achieve the inflation target is determined by a majority vote, unlikethe current practice, whereby the RBI governor decides the monetary policy.

Although there is a technical advisory committee composed of internalmembers and external experts currently, their role is purely advisory and theRBI governor is under no obligation to abide by its views. The broad view isthat the committee-based approach will add credibility and transparency tomonetary policy decisions.

Members and tenure: As per the latest press release, out of the six membersof MPC, three members will be from the RBI: (a) the Governor, who will be theex-officio Chairperson; (b) the Deputy Governor; and (c) one officer of RBI.

The other three members of MPC will be appointed by the CentralGovernment, on the recommendations of a search-cum-selection committee,which will be headed by the Cabinet Secretary. These three members of MPCwill be experts in economics, banking, finance or monetary policy, and will beappointed for a period of 4 years and will not be eligible for re-appointment. Ithas been advised that the meetings of the MPC will be held at least 4 times ayear and it will publicise its decisions after each such meeting.

Accountability: The MPC will be accountable if the inflation target is not metand the RBI must set out a report to the Central government stating the: (a)reasons for the failure; (b) remedial actions proposed; and (c) the likely periodof time over which the inflation target is proposed to be achieved pursuant totimely implementation of proposed remedial actions.