- Government and central bank each get three voting members
- Consumer-price inflation target will be set every five years
India’s central bank governor will get the tie-breaking vote in a new monetary policy committee, according to people familiar with the matter.
The government and central bank will each appoint three of six voting members, according to the people, who asked not to be named because the agreement isn’t yet public. The majority’s decision will be binding, with the central bank governor holding a casting vote in a deadlock, the people said.
The details suggest a compromise from a previous draft bill released by the Finance Ministry in July that gave the government majority control over the rate-setting body. Reserve Bank of India Governor Raghuram Rajan confirmed last month that an agreement had been reached and would soon be announced by Prime Minister Narendra Modi’s government.
Finance Ministry spokesman DS Malik couldn’t be reached. Central bank spokeswoman Alpana Killawala didn’t immediately comment on the MPC when reached by phone.
“As Rajan said, de facto independence is more important than de jure," Arvind Chari, head of fixed income at Quantum Advisors Pvt. in Mumbai, said by phone. “If it means that the RBI will continue to have the de facto independence that it has had till now, then it’s good.”
Representation on the committee had been a key sticking point between Rajan and Modi’s administration as they look to finalize a rate-setting structure similar to the Federal Reserve or Bank of England. They agreed earlier this year on an inflation target, one of the biggest reforms in the bank’s 80-year history.
The MPC will consist of the RBI governor, a deputy governor, a central bank official and three persons nominated by the federal government, according to the people. One other non-voting member will be appointed by the government, the people said.
The committee will meet every two months, and its members will all have terms of four years, the people said. The objective would be to primarily maintain price stability while keeping in mind the objective of growth, the people said.
The government will determine a consumer-price inflation target every five years in consultation with the RBI, according to the people.
Rajan has resisted growing pressure from the Finance Ministry to ease policy. He left borrowing costs unchanged at 7.25 percent at an Aug. 4 meeting after three cuts this year to meet his inflation target of 6 percent by January. The next meeting is on Sept. 29.