Centre and Reserve Bank in talks to effect statutory backing for the committee
The government wants to make sure that the monetary policy committee (MPC) that will take over interest-rate-setting functions has strong legal foundations and to that end has started discussions with the Reserve Bank of India (RBI).
This new monetary policy framework will replace the February 2015 agreement between the two.
The finance ministry has already sent a formal communication to the RBI on the issue.
“Some preliminary discussions have started,“ said a senior government official. “The previous framework was non-statutory and so a new one has to be finalized.“
The earlier 2015 monetary policy framework agreed to between the government and the central bank predates the amendment of the RBI Act in the budget session this year to provide for the MPC.
The 2015 agreement, therefore, lacked legal backing.
Based on the amended RBI Act, the government will issue a new framework through rules for which discussions have started.
The finance ministry wants to move quickly on this given that the new framework needs to be in place before the MPC selection process is finalized, the official said.
Two deadlines are coming upthe next monetary policy review is scheduled for August 9 and RBI governor Raghuram Rajan leaves office less than a month later. The government is expected to announce his successor shortly after Prime Minister Narendra Modi returns from his Africa visit on July 11. The objective of the framework sig ned in February 2015 is to “primarily ma intain price stabili ty, while keeping in mind the objective of growth.“ Under that agreement, the RBI would set policy in terest rates and aim to bring inflation be low 6% by January 2016 and within 4% with a band of +-2% for FY17 and all subsequent years.
This year, through the Finance Act 2016, the government amended the RBI Act to put in place a new monetary policy framework.
The new framework is being negotiated with the RBI on the back of this amendment that has also proposed the creation of a sixmember MPC that will set interest rates in line with the inflation target in the framework.
The government has already tasked a search and select panel headed by the cabinet secretary to identify the three non-RBI members of the MPC. The selection rules, terms of appointment and factors constituting failure to meet the inflation target under the MPC Framework were notified on June 27, 2016. The other three members will be from the RBI and include the governor as the panel's head.
Rajan's successor may join as officer on special duty as the government is keen on ensuring a smooth transition at the central bank, especially in wake of the global situation after Brexit.
The Economic Times New Delhi,06th July 2016
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