The Finance Ministry aims to complete the formalities for implementation of the new Monetary Policy Framework Agreement by February 1. However, it will be left to the Reserve Bank of India to decide on the date of implementation.
The proposed framework aims to change the monetary policy formulation and will also focus on inflation targeting. Traditionally, the monetary policy formulation is a closed-door affair in the RBI. But, with the new system, an eight-member Monetary Policy Committee will now take a call on the policy, and the central bank will then implement it.
“The Finance Ministry is writing to the RBI seeking its comments on the proposed policy. The proposal will then be placed in the public domain before finalising the agreement,” a senior Finance Ministry official told
Finance Minister Arun Jaitey, in his Budget speech on July 10, had said, “It is also essential to have a modern monetary policy framework to meet the challenge of an increasingly complex economy. Government will, in close consultation with the RBI, put in place such a framework.”
The proposed framework is based on a combination of recommendations by FSLRC (Financial Sector Legislative Reforms Commission) and the Urjit Patel Committee, along with inputs from the Rajan Panel on Financial Sector Reforms.
“It is one of the biggest non-legislative actions on the suggestions given by FSLRC,” the official added.
As recommended by the FSLRC, the committee would comprise the Governor and a Deputy Governor (in-charge of monetary policy), besides five members from outside and a Government nominee. The decision will be based on the majority view to be established through voting. However, the Government nominee will not have voting right and will simply provide inputs from the Government.
The official said once the draft framework is finalised, an agreement will be signed between RBI and the Finance Ministry. This will be the second agreement for a big shift after both sides signed an agreement for ways & means in 1997.
The proposed policy framework has also drawn inspirations from the UK. It also prescribes the proceedings of Monetary Policy Committee to be made public with a time lag and proper attribution.