I am sure you now have some idea of what monetary policy is after the brief introduction in part 1. Some of you might be wondering why a committee. As explained in the previous blog, the Governor of RBI decides on the interest rate under the monetary policy framework (even though he is assisted and aided by a technical committee and a host of internal resources in RBI). We have seen in the recent times raging debates on the interest rate decisions of the RBI and this has been a bone of contention in many fora. Hence a decision on the interest rate taken by an individual, as it were, can cause consternation to many of the stakeholders. There is a huge responsibility on the shoulders of the Governor of Central Bank to determine the policy rate through the monetary policy framework. Often times it is seen as an individualistic pronouncement causing wholesome disquiet – Government is unhappy, industry is unhappy, borrowers are unhappy, lenders are apparently unhappy with any rise in interest rate. For more insight and meaty material you are encouraged to read the book titled ‘Who Moved My Interest Rate?: Leading the Reserve Bank of India Through Five Turbulent Years’ written by Duvvuri Subbarao, former Governor of the Reserve Bank of India.
So, when a committee decides, there appears to be a collective decision of experts in the field, looks more objective and transparent. Globally, therefore, many economies appointed a committee to decide on the monetary policy frame work.
Genesis of MPC in India
The first suggestion for a monetary policy committee could be seen in the recommendations of the ‘Advisory Group on Transparency in Monetary and Financial Policies’ (September 2000). The Advisory Group recommended that the Reserve Bank should set up a Monetary Policy Committee as a committee of the Central Board, for formulating monetary policy. The group recommended further that the Government should consider setting out to the Reserve Bank a single objective for monetary policy, viz., control inflation rate and it should be given unfettered instrument freedom and held accountable for attaining this objective. The Tarapore committee on Fuller Capital Account Convertibility (2006) recommended the setting up of a Monetary Policy Committee to strengthen the institutional framework. In 2013, the Financial Sector Legislative Reforms Commission (FSLRC) made a strong recommendation for the establishment of a MPC. The final straw for the formation was provided by the Report of the Expert Committee to Revise and Strengthen the Monetary Policy Framework popularly known as Dr.Urjit Patel Committee Report (January, 2014).
According to the Committee, “Heightened public interest and scrutiny of monetary policy decisions and outcomes has propelled a worldwide movement towards a committee based approach to decision making with a view to bringing in greater transparency and accountability in India.”
Formation mechanics
The precursor to the formation of MPC was the signing of the Monetary Policy Framework Agreement between the Reserve Bank of India and Government of India on February 20, 2015.
http://finmin.nic.in/reports/MPFAgreement28022015.pdf.
Subsequently, the government, while unveiling the Union Budget for 2016-17 in the Parliament, proposed to amend the Reserve Bank of India (RBI) Act, 1934 for giving a statutory backing to the aforementioned Monetary Policy Framework Agreement and for setting up a Monetary Policy Committee (MPC). Through the Finance Bill 2016, a new chapter IIIF was introduced in the RBI Act 1934 detailing the set up and operation of the Monetary Policy Committee.
Finance Bill 2016 may be accessed at http://indiabudget.nic.in/ub2016-17/fb/bill.pdf.
Thus the seeds were sown for the birth of MPC in India
Let’s have a look and feel of the MPC when we meet next… see you