Government of India Volume I: Analysis and Recommendations

Table of Recommendations 11.2 The monetary policy committee
MONETARY POLICY
1. The MPC will be chaired by the Chairperson of the central bank. It will have one executive member of the
board of the central bank and five external members.
2. External members will be independent experts in the field of monetary economics and finance. These members
will be appointed by the Central Government, where in case of two of these members, the appointment
will be in consultation with the Chairperson.
3. The external members will extensively engage with the organisation and have access to data (except data on
individual financial firms that is related to the supervisory process), research and other office facilities. However,
they will have no management or operational role within the central bank. They will not be members
of the board or any of the two advisory councils (described ahead). Their only function in the central bank is
to be members of the MPC.
4. The MPC will meet periodically and vote on all instruments of monetary policy. The main briefing report of
the central bank’s research department to the MPC would be released to the public one day before the MPC
meeting.
5. A representative of the Central Government would participate in the MPC meetings, but would not have a vote.
The representative would express the views of the Ministry of Finance and these views would be released into
the public domain.
6. Decisions of the MPC would be made on a one-person one-vote basis.
7. Each of the seven members will also submit a rationale statement about his/her vote. With a lag of three
weeks, the voting record and all seven rationale statements would be released into the public domain.
8. The central bank Chairperson would have the power to override the MPC in exceptional circumstances. However,
he/she would be required to release a rationale statement in public, explaining the reasons for disagreeing
with the MPC.
11.4. The monetary policy committee
The Commission recommends the creation of an MPC that would determine the policy
interest rate. In addition to the Chairperson and one executive member of the board,
the MPC would have five external members. Of these five, two would be appointed by
the Central Government, in consultation with the Chairperson, while the remaining three
would be appointed solely by the Central Government. These members must not be employees
of the Government or the central bank or be involved in political activity. They
may be permitted to hold other offices or positions during their tenure as MPC members,
subject to there being no conflict of interest. In order to avoid conflict of interest, external
members should: (a) be restricted from certain activities or affiliations outside the central
bank – these may include restrictions on involvement in financial institutions; and (b) not
have allied commercial interests that may give them unfair advantage due to access to
privileged information obtained in their capacity as members of the MPC.
MPC members would have access to relevant information within the central bank,
other than information about individual financial firms that is related to the supervisory
process. The members would interact with the research department on an ongoing basis.
This would provide the members with a complete information base required to vote on
monetary policy decisions.
This arrangement, which has been adopted in the monetary policy process worldwide,
has many strengths. A formal voting structure, coupled with the release of the voting
record and rationale statement, ensures that each member analyses the questions
and arrives at his/her own judgement; and ensures that it diminishes the extent to which
an individual can dominate the MPC meeting.
Monetary policy faces a challenge in terms of the dangers of political interference,
particularly in the period prior to elections. The political leadership may often try to pressure
the head of the central bank, asking for accommodative monetary policy. By placing
the decision clearly in the hands of the MPC, there is no one person that can be pressured.
A representative of the Central Government, would participate in MPC meetings but would
not have a vote.
106 FINANCIAL SECTOR LEGISLATIVE REFORMS COMMISSION