[Answered] Discuss the rationale behind the recent Amendment to the RBI Act ? Do you think establishment of a Monetary Policy Committee will help balance growth and inflation?

The recent Amendment to the RBI Act was brought in order with the to hand over the job of monetary policy-making in India to a newly constituted Monetary Policy Committee.

Rationale

  • The rationale behind this move is that in the wake of global slowdown; growth of Indian economy has received a setback.
  • Countries are devaluating their currencies, using protectionist measures and also using unethical trade measures like “dumping”; in order to adjust to the “new normal” (as economists define the current market scenario);
  • the role of government has expanded in inflation targeting.
  • This is only possible if the current autonomy of RBI Governor in deciding policy rates is compromised – industry experts nominated by the government  will now assist him in the decision – making process.

Highlights of Monetary Policy Committee (MPC):

Urjit Patel committee suggested the formation of a 6-member monetary policy committee. 

 

  • The six-member Committee is tasked with bringing “value and transparency to monetary policy decisions”
  • It will comprise 3 members from RBI: Governor (ex-officio chairperson), a Deputy Governor and one officer of the central bank.
  • The other three members will be appointed by the Centre on the recommendations of a search-cum-selection committee to be headed by the Cabinet Secretary.
  • These three members of MPC will be experts in the field of economics or banking or finance or monetary policy and will be appointed for a period of four years and shall not be eligible for re-appointment.
  • The Committee is to meet four times a year and make public its decisions following each meeting.

 

Role of MPC in balancing Growth & Inflation

  • Until recently RBI was taking monetary policy decisions based on the multiple indicator approach; considering multiple factors: inflation, growth, employment, banking stability and the need for a stable exchange rate
  • As per the Urijit Patel Expert Committee recommendation; RBI shall now abandon the ‘multiple indicator’ approach and make inflation targeting the primary objective of its monetary policy
  • As per the new policy, central bank and the government can make “more timely and appropriate” fiscal and monetary targets as a result of unified decision – making
  • Decisions will now be made through majority vote  – unlike before, when all decisions were handed down by RBI Governor. This is expected to nullify any impact that arises out of bias and lobbying
  • It is also expected to rope in more accountability: The Government would have to keep its deficit under check and RBI would owe an explanation for runaway inflation
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