Finance Bill makes way for monetary panel on policy rate

The move to strip the Reserve Bank of India Governor of powers to set interest rates by transferring the authority to a broader panel is a step closer to reality with the Lok Sabha on day approving the Finance Bill 2016.

The Finance Bill 2016 contained an amendment to the Reserve Bank of India Act of 1934 giving the central bank a mandate to target inflation.

“We have drafted the amendment (to the RBI Act) in consultation with the RBI so that inflation is reduced,” Finance Minister Arun Jaitley said in his hour-long reply to the debate on the Bill.

The six-member monetary policy committee (MPC), which will include RBI Governor and three nominees of the government, will set interest rates to bring consumer or CPI inflation to pre-set targets.

“Inflation targets will be set once every five years,” he said, adding the MPC would have three representatives each from government and RBI with the central bank governor having the casting vote.

After the Finance Bill is approved by the Rajya Sabha, the process of setting up of the MPC will be set in motion.