Differences emerged on Sunday between the Reserve Bank and the Finance Ministry over the structure of a committee that will set interest rates and take monetary policy decisions — instead of the central bank's Governor. However, both the RBI and the government played down reports of friction over the biggest regulatory shake-up in its 80-year- old history.
After addressing the Reserve Bank's Board of Directors, Union Finance Minister Arun Jaitley told presspersons that the central bank and the Ministry were in continuous discussions including on proposed amendments to the RBI Act that he had announced in his Budget Speech. "There is no disconnect," Mr. Jaitley said.
While the RBI Act empowers the Governor 'singularly' and 'solely' to set rates, the Ministry is making a case for the task to be given to an eight-member monetary policy committee that includes a government nominee but with no voting rights.
The Reserve Bank, however, favours a five-member panel where the majority would determine policy decisions and the Governor would act as tiebreaker only if a member was absent. The Reserve Bank's proposed five-member committee would include two outside experts picked by it but no government nominee.
"Until the proposed amendments are ready and passed by Parliament, the Governor will continue to set rates as laid out in the RBI Act," an RBI source said.
In an agreement the RBI signed last month with the government, it committed to bring inflation below 6 per cent by January 2016. The consumer inflation target has been set at 4 per cent, with a band of plus or minus 2 percentage points, for the financial year 2016-17.
"The operating framework available to the Reserve Bank under the agreement is sufficient legal basis for it to conduct monetary policy and the agreement can be renewed if by the date of its expiry, the RBI Act amendment is not passed in Parliament," the RBI source explained.
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