RBI monetary policy council to now decide interest rates

The Rajya Sabha has approved setting up a panel to decide interest rates. The measure was part of a broader finance Bill approved by the Lok Sabha last week meaning it now becomes a law. Currently, RBI governor Raghuram Rajan is the sole authority for monetary policy decisions with assistance from a panel that is purely advisory.

Under the new law-and from a date that has yet to be set-a six-member monetary policy council will set interest rates by majority with a casting vote for RBI governor in the event of a tie. Three members will be representatives from the government and three from the RBI. Members from the RBI side would be governor, deputy governor in charge of the monetary policy and an officer of the RBI to be nominated by the Central Board.

The government-nominated members would be appointed on recommendations made by Search-cum-Selection Committee. Now Reserve Bank of India's (RBI) policymaking process is in line with that of Central banks in developed economies.

The Bill also requires the RBI to review its inflation target every five years. There is currently no set time frame for such reviews.