The government has initiated the process to establish its monetary policy committee (MPC). The MPC will be composed of six voting members: three from the Reserve Bank of India (RBI) and three government-appointed members.
In the monetary policy framework agreement signed by the government and the RBI in February 2015, the inflation target beyond March 2017 was set at 4% with a band of +/-2%. Whether the same target will be retained or changed will be an important signal of the government’s inflation tolerance, said a recent Nomura report, Asia Insights. For instance, the government may choose to accept slightly higher inflation (as long as it is within the band), rather than focus on achieving the mid-point of the band.
However, three steps remain in the process. First is the establishment of the selection committee (which makes recommendations for the three government-appointed MPC members). Second, based on the selection committee’s recommendations, three government-appointed MPC members need to be chosen. Third, the government (after consulting with RBI) has to establish the inflation target for the next five years and make the appropriate notification in the official gazette.
In three separate notifications in the official gazette, the government set 27 June 2016 as the date on which provisions relating to amending the RBI Act came into force, laid down factors that will constitute a failure to achieve the inflation target, and listed the procedure for selecting MPC members and their terms and conditions.
According to the finance Bill, the monetary policy committee’s structure will be as follows:
Objective of monetary policy: The primary objective will be to “maintain price stability while keeping in mind objective of growth."
Composition of the MPC: The MPC will comprise of six voting members, with three from the RBI (the governor, the deputy governor in charge of monetary policy and an RBI official nominated by the central board) and three government-appointed members.
The three government-appointed members will be from the fields of economics, banking, finance or monetary policy. These members will be appointed based on recommendations from a committee (which is composed of the Cabinet Secretary, the RBI governor, the Secretary of the Department of Economic Affairs and three experts nominated by the central government).
Tenure: The MPC members will hold office for four years with no re-appointment.
Inflation target: The central government in consultation with RBI will determine the inflation target once every five years. The target will refer to year-on-year Consumer Price Index-based inflation (CPI) combined. The MPC’s objective will be to determine a policy rate to achieve this inflation target.
In terms of the expected timelines, media reports state that the MPC may be in place before the next monetary policy meeting on 9 August.
While possible, this timeline might be quite ambitious. A more likely timing for the MPC to be in place seems to be before 4 October, ahead of the policy meeting.
Edited excerpts of Nomura report Asia Insights.