Finance ministry moves cabinet note on monetary policy committee

The finance ministry on Friday moved a cabinet note on setting up the Monetary Policy Committee (MPC), which will play a dominant role in interest-rate setting, which has so far been the sole prerogitive of the Reserve Bank of India.

The proposed monetary policy committee (MPC) will have six members, with three members from the Reserve Bank of India, including the governor, who would have a casting vote. The other three members will be appointed by the government from outside the RBI.

Besides the six members, a finance ministry nominee would also take part in the deliberations of the committee to convey the government's views on policy, but he won't have a voting right.

"The government has prepared a Cabinet note on MPC. RBI is a very credible institution and nothing will be done in MPC composition that undermines the role of RBI," a senior finance ministry official said.

The MPC will replace the current practice of the governor deciding on interest rate on advice of the technical advisory committee.

A proposal in this regard has already been circulated for the cabinet's approval. A bill on the MPC is likely to be introduced in the winter session of Parliament in November-December.

The revised draft of the Indian Financial Code (IFC), released by the ministry in July, had suggested doing away with RBI Governor's veto power and proposed a 7-member MPC to take decisions by a majority vote. Of the seven members, four were to be government nominees and the rest from RBI.

But this has been changed with a six-member panel and a casting vote for the governor instead of a seventh member.