The finance ministry proposal calls for the formation of an eight-member committee headed by RBI governor and a deputy that includes one government nominee with no voting rights, according to two people who asked not to be identified. Photo: Bloomberg
The finance ministry proposal calls for the formation of an eight-member committee headed by RBI governor and a deputy that includes one government nominee with no voting rights, according to two people who asked not to be identified. Photo: Bloomberg

Modi said to give Raghuram Rajan veto power to meet India’s CPI goal

Modi govt backs RBI proposal to make CPI-based inflation the predominant objective of monetary policy for the first time

New Delhi: Indian Prime Minister Narendra Modi’s administration has proposed giving the central bank governor Raghuram Rajan veto power over a new monetary policy council that for the first time would focus on price stability as its main mission, people with knowledge of the matter said.

The finance ministry proposal calls for the formation of an eight-member committee headed by the Reserve Bank of India (RBI) governor and a deputy that includes one government nominee with no voting rights, according to two people who asked not to be identified because the discussions are private. The RBI governor, a senior finance ministry bureaucrat and an outside expert will help pick the other five members, they said.

The proposal differs from January recommendations from an RBI panel backed by Rajan to create a five-member committee in which the majority would determine the policy decisions, with the central bank chief breaking a tie if a member was absent. Under that proposal, members would include the governor, his deputy and two outside experts picked by them, along with an RBI official handling monetary policy.

The changes are part of the most sweeping overhaul to monetary policy in the central bank’s 78-year-old history. Modi’s government backs the RBI’s proposal to make consumer price index (CPI)-based inflation the “predominant objective" of monetary policy for the first time, the people said, while also saying it should promote economic growth and employment.

Talks continuing

Discussions between the government and RBI are continuing, the people said. Both plan to sign a framework agreement in the next few months that takes effect in the next financial year beginning 1 April, they said. D.S. Malik, a finance ministry spokesman, declined to comment on discussions related to the monetary policy framework.

Under current rules, the governor alone makes policy decisions with input from an advisory group and central bank officials. Rajan has held the repurchase rate at 8% for the past four meetings after adopting the RBI panel’s recommendation to bring down consumer-price inflation to 6% by January 2016.

Rajan said last month the central bank was on pace to hit that target, discounting an RBI model that said 7% was likely. India’s retail inflation of 7.8% is the highest among 17 Asia-Pacific economies tracked by Bloomberg, and compares with 2% in China and 4.53% in Indonesia.

The finance ministry proposal said the CPI target would be agreed to during consultations between the government and central bank, the people familiar said. The central bank had proposed a target of 4% with a plus-or-minus 2 percentage point band. Bloomberg

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