RBI decides the monetary rates to control the inflation. RBI governor had the final say it this matter till date. He was assisted by RBI’s Monetary Policy Department and Technical Advisory Committee, but he was not bound to take decisions based on this advice.
But the recently passed Finance Bill 2016 a.k.a Union Budget 2016 which also included an amendment to the RBI Act clipping the central bank governor’s powers to set monetary policy.
A six-member Monetary Policy Committee will be formed for this purpose. The committee will three members nominated by the government(other than any government officials) and three members from RBI. The RBI Governor will chair the committee. Decisions will be taken by majority vote with each member having a vote. The governor, however, will not enjoy a veto power to override the other panel members, but can cast a vote in case of a tie. The members of the committee will be appointed for 4 years without a provision for reappointment.
Search-cum-Selection Committee under Cabinet Secretary, along with RBI Governor, Economic Affairs Secretary and three experts in the field of economics or banking or finance or monetary policy as its members will select the government nominees to the Monetary Policy Committee.
Monetary Policy Committee will set interest rates to keep retail inflation within targets which is set by the government every five years.
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