Dawn of a new era: Monetary Policy Committee notified; to meet on October 3

NEW DELHI: The government has notified the Monetary Policy Committee, clearing the last formality in the switchover to a new regime for setting interest rates. The sixmember committee will meet on October 3, a day before the next monetary policy is announced, a member of the panel told ET. “A committee-based approach for determining the monetary policy will add lot of value and transparency to monetary policy decisions,” the finance ministry said in a statement on Thursday, making the formal announcement.

“The provisions of the RBI Act relating to monetary policy have been brought into force through a notification in the gazette.” Under the new arrangement, the RBI will need to target consumer inflation at 4%, with an upper limit of 6% and a lower limit of 2%. The committee will meet at least four times a year and will publish its decisions after each meeting. “The Monetary Policy Committee would be entrusted with the task of fixing the benchmark policy rate (repo rate) required to contain inflation within the specified target level,” the ministry said.

There is some hope the RBI will cut rates in its October 4 review after consumer inflation fell sharply to 5.05% in August from 6.07% a year earlier.

If inflation stays outside the target band for three consecutive quarters, it would constitute failure of the monetary policy and the RBI will need to state the reasons and the corrective measures needed. The panel will take interest rate decisions through a majority vote and in the event of a tie, the RBI Governor will have a second vote.

The government appointed three members to the MPC earlier this month – Chetan Ghate, Professor, Indian Statistical Institute; Pami Dua, Director of the Delhi School of Economics, and Ravindra H Dholakia, Professor, IIM-Ahmedabad. The other members are from the RBI – the Governor, the deputy governor responsible for monetary policy and an officer of the central bank to be nominated by the Central Board.