Budget 2015: Interest rate will be decided by a panel comprising representatives from government and RBI

http://articles.economictimes.indiatimes.com/2015-03-01/news/59642185_1_rbi-act-inflation-target-key-policy-rate
Tags:

·         Urjit Patel committee|

·         RBI|

·         Inflation|

·         Budget 2015

·         

(Arun Jaitley announcing…)

The government and the Reserve Bank of India may work together to formalise the target of keeping inflation at below 6%, with Finance Minister Arun Jaitley announcing in his budget speech on Saturday that the Centre has just concluded a formal agreement with the central bank to this effect.

"To ensure that our victory over inflation is institutionalised and hence continues, we have concluded a Monetary Policy Framework Agreement with the RBI, as I had promised in my budget speech for 2014-15," the minister said, referring to the framework which clearly states the objective of containing inflation within the 6% mark. Jaitley added, "We will move to amend the RBI Act this year, to provide for a Monetary Policy Committee."

Allaying apprehensions that there could be some opposition to the proposal from the central bank as some feel that it could lead to some dilution of its autonomy, Jaitley said: "The Monetary Policy Framework Agreement has been signed by the Governor of RBI so I don't see how they will be opposed to it."

The decision to develop a monetary policy framework follows from the recommendation by the Urjit Patel committee, which had suggested that RBI target to bring down retail inflation to 8% by January 2015 and 6% by January 2016.

"The proposal for a monetary policy committee is a key aspect of the new framework. In line with international best practices, it is likely to provide greater transparency on the decision-making process," said Saugata Bhattacharya, chief India economist at Axis Bank. "External experts, from government and outside, will have a voting rather than an advisory role. The broader dispersion of voting also incorporates a diversity of viewpoints, making the decision outcome more robust," he added. The government had made its stance amply clear in its survey of the economy released on Friday.

"The government and the RBI need to conclude the monetary policy framework agreement to consolidate the recent gains in inflation control and codify into an institutional arrangement what has become the de facto practice," the survey said. It added that this arrangement "would signal that both government and RBI jointly share the objectives of low and stable inflation". Under the new framework, the interest rate or key policy rate will be decided by a monetary policy committee comprising representatives from both the government and RBI. In countries such as Canada, which has adopted inflation targeting as its monetary policy objective, the government mandates an inflation target to the central bank.

Ever since the RBI put the Report of the Expert Committee to Revise and Strengthen the Monetary Policy Framework or what is popularly known as the Urjit Patel committee report in public domain, it virtually stopped following the multiple indicator approach of looking at parameters like credit, deposit and money supply among others. It started looking at CPI as a formal monetary policy objective. Jaitley had in his previous budget said it is essential to have a modern monetary policy framework to meet the challenge of an increasingly complex economy.