India has appointed three independent experts to Reserve Bank of India’s (RBI) Monetary Policy Committee (MPC) to set interest rates as the central banking institution gears up for a switch in terms of deciding its new policy.
The three experts -- Chetan Ghate, professor at Indian Statistical Institute, Pami Dua, director at Delhi School of Economics, and Ravindra Dholakia, professor at Indian Institute of Management, Ahmedabad -- will join RBI Governor Urjit Patel and two senior officials from the bank's monetary policy department.
Deputy governor R Gandhi and executive director Michael Patra are the two other senior officials from RBI.
The commitee will be responsible for setting the key interest rates in the monetary policy review, thereby diluting the power of the RBI governor. It will meet four times in a year to decide on the monetary policy of India by a majority vote. In case of a tie, the RBI governor has the deciding vote.
The three independent experts were recommended by a search committee.
It's pertinent to mention that the Indian government amended the RBI Act on June 27, 2016 to shift the job of monetary policy-making in India to a newly constituted Monetary Policy Committee (MPC).
Until recently, a technical advisory committee was constituted by the RBI, which consisted of governor, deputy governor and external advisors to give their opinion and suggestions for deciding RBI's monetary policy.
However, the governor's word was final on the rates and the recommendations of the technical advisors were not binding on the RBI.
In 2014, it was the Urjit Patel Committee that recommended the setting up of an MPC for determining interest rates and also, move from multiple indicator approach to inflation targeting. Having both Government and RBI members on the MPC was suggested for accountability.
The Indian government would have to keep its deficit under check and RBI would owe an explanation for runaway inflation.
Monetary policy decisions by central banks have far-reaching implications for the economy, investors, savers and borrowers. Hence, with only governor having the decision-making authority raises questions the accountability of the entire process.
Across the world, several countries, including New Zealand, England, Canada, South Africa, Sweden, have tried to make the process transparent by appointing a committee and adopting inflation targeting as a monetary policy objective.