With the setting of MPC, the interest rate setting powers would move from RBI Governor to the panel.
RBI Governor Raghuram Rajan, who unveiled his last monetary policy before exiting next month, on Tuesday said a broadbased multi-member panel will decide on the interest rate at the next review on October 4.
Rajan, who demits office after completing his 3-year term on September 4, said that half of the six-member monetary policy committee (MPC) are already in place and the government will name its nominees shortly.
With the setting of MPC, the interest rate setting powers would move from RBI Governor to the panel.
"I think there is some likelihood that the next decision will be made by the MPC rather than an individual. If that is the case, there would be six people sitting together and deciding what the path of interest rates will be. I think, we should expect them to take an independent decision and I am sure they will," Rajan said.
Pressed further as to why he is so hopeful that the next policy would be by the MPC, Rajan said except the selection of three members that the government has to decide on everything is in place.
"The process has already started. It is not going to take a long time to do that," he said at the customary post- policy press conference.
On the RBI's side, Rajan said, the Board has selected Michael Patra to be the RBI Board nominee on MPC. The other two members from the RBI will be the Governor and the Deputy Governor in charge of monetary policy.
"With the formation of the MPC, the Government and the RBI will have completed a fundamental institutional reform, which modernises India's monetary policy framework and builds a platform for strong and sustainable growth," Rajan said.
Asked what will be his advice to successor against inflation, Rajan said: "I won't advise my successors".
Moving towards the new regime, the government last week notified 4 per cent inflation target for the next five years, based on which the MPC would take its monetary policy decisions going forward.
The move, which provides for a margin of plus or minus 2 per cent in this target thus fixing the upper tolerance level at 6 per cent till 2021, is being seen as government putting the seal on outgoing Governor's inflation-first model of monetary policy.
In accordance with a monetary policy framework agreement it had entered into with the Reserve Bank in February last year, government notified consumer price inflation target of 4 per cent for the next five years, with an upper tolerance level of 6 per cent and lower tolerance limit of 2 per cent.
The Monetary Policy Committee (MPC) will set interest rates by majority, with a casting vote for the central bank governor in the event of a tie.
Out of six members of MPC, three will be from RBI – the Governor, who will be the ex-officio Chairperson, a deputy governor and an executive director.
The other three members will be appointed by the central government, on the recommendations of a search-cum-selection committee, which will be headed by the Cabinet Secretary.
