Reserve Bank of India Governor Raghuram Rajan said on Thursday that the government and the RBI have agreed on composition of the monetary policy committee (MPC) that will set the central bank's interest rates."MPC agreement has been largely done. Only fine-tuning is left. The government and RBI are broadly on the same page on composition of MPC," Rajan told reporters here.He also said the decision on when to set up the committee will be taken by the finance ministry.Under the current system, the RBI governor has the veto over the existing advisory committee, composed of RBI members and outside appointees, that decides on policy rates.
A draft Indian Financial Code was released by the Financial Sector Legislative Reforms Commission earlier this year, inviting comments from the public.Besides taking away the Reserve Bank of India governor's authority to veto interest rate decisions, the draft also proposed that the monetary policy committee would have four representatives of the government and only three from the central bank, including the RBI 'chairperson'. The draft also said that the RBI "must constitute a Monetary Policy Committee to determine by majority vote on the policy rate required to achieve the inflation target".The current practice is that the RBI governor consults a Technical Advisory Committee, but does not necessarily go by the majority opinion while deciding on the monetary policy.
The revised draft of the IFC, which is conceived as an overarching legislation for the financial sector, says "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".Apart from the RBI 'chairperson', the monetary policy committee would consist of five members - an executive member of the Reserve Bank Board, an employee of the RBI nominated by the RBI 'chairperson' and others appointed by the government.In the original draft, the RBI 'chairperson' had power to "supersede the decision" of the committee in "exceptional and unusual circumstances".