Finance ministry to seek cabinet nod for monetary policy panel; no veto power for RBI governor

NEW DELHI: No veto, but a casting vote. That’s what the Reserve Bank of India governor could have on the Monetary Policy Committee, according to the proposal that the finance ministry is readying to present to the Cabinet. This is based on an understanding that the finance ministry has reached with RBI on the contours of the committee. Once Cabinet approves the plan, the government will move legislation in Parliament to amend the RBI Act to pave the ground for the creation of the committee, setting in motion a key reform that was in Finance Minister Arun Jaitley’s February Budget.

The panel is expected to have balanced representation from the central bank and the government, but RBI will also have a say in the appointment of any external nominees, officials said.


“There will be inter-ministerial consultations on the MPC proposal and then it would be taken to the Union Cabinet,” said a finance ministry source.

“Understanding has been reached on MPC to the comfort of RBI,” said another finance ministry official. The structure is at variance with that proposed in the draft Indian Financial Code (IFC) recently posted on the finance ministry website that had proposed a seven-member MPC with four members appointed by the government and no mention of a veto for the governor.

That had led to a controversy, with critics accusing the government of seeking to clip RBI governor’s wings, forcing the finance ministry to backpedal and say the draft merely encapsulated the views of the “people”.

Finance Secretary Rajiv Mehrishi was at pains to point out on Monday that agreement with RBI had been reached on MPC and the storm further abated the next day after RBI Governor Raghuram Rajan said a veto was not necessarily a good thing. A committee would be far more effective, he said.

The earlier version of IFC drafted by the Financial Sector Legislative Reforms Commission had proposed a seven-member MPC with three being nominated by the government and three by the central bank plus the governor, who would have a veto.