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Not just RBI, now these three will also fix your interest rates

  • Government appoints three new members to the new monetary policy committee
  • The MPC will end the tradition of only the RBI governor deciding on interest rates


interest rates rbi



The rate of interest you pay on your home loan or auto loans will now also be decided by three new members of the Monetary Policy Committee (MPC) which have recently been appointed by the government. These members are Chetan Ghate, professor at the Indian Statistical Institute; Pami Dua, Director Delhi School of Economics and Ravindra H Dholakia, professor at IIM-Ahmedabad.  


They along with RBI nominees are likely to set the benchmark interest rate in the upcoming monetary policy review on October 4, 2016 with a view to contain retail inflation at the targeted level of 4%.


The Appointments Committee of the Cabinet (ACC) cleared the three eminent experts as members on the MPC for a period of four years, a government notice said.

RBI nominees are governor, a deputy governor and one more representative from the central bank.

Although, the possibility of a reduction in interest rates looks less likely as inflation has bottomed out leaving RBI with less room to undertake further rate cuts, India Ratings and Research (Ind-Ra) said last week,.

"Inflation appears to have bottomed out, however, inflationary expectations have once again shown an uptick," Ind-Ra said in a statement."As per data released by the central bank, mean household inflationary expectations for three months ahead in June 2016 rose by 110 bps to 9.2 per cent from the March 2016 survey," it added. 

The RBI carries out a quarterly survey of about 5,000 households across 16 cities in India to assess inflationary expectations of households -- three months ahead and one year ahead.

The rating agency pointed out that though global factors, particularly low interest rates and fund inflows into emerging markets, have remained favourable for a fairly extended period of time, the likelihood of interest rates moving up from here has strengthened -- notwithstanding the fact that the US Federal Reserve may still take some time to resume hiking rates.

Ghate was part of a five-member technical advisory committee that provided advice on interest rates to the RBI Governor ahead of each policy review.

RBI's fourth bi-monthly monetary policy review for 2016-17 is scheduled on October 4, and interest rate decision is expected to be taken by the panel instead of the current practice of the RBI Governor alone.

The MPC was set up by amending the Reserve Bank of India Act, 1934, through the Finance Act 2016. The MPC will work with regard to setting up interest rate to meet the inflation target fixed by the government.

Under the agreement with the government, RBI is committed to anchoring retail inflation at 4%  (plus/minus 2 per cent) and has set itself a target of 5% by next March as part of a 'glide path' to achieving the median mark.


As per the norms for MPC, each member shall have one vote and in case of a tie, the RBI Governor shall have a casting vote. Presently, the Governor has over-riding powers to accept or reject the recommendation of RBI's panel on monetary policy.

The Governor will have a casting vote once the country shifts to the panel system.

Members of the MPC will be appointed for a period of four years and shall not be eligible for reappointment.

The idea of setting up an MPC was mooted by an RBI-appointed committee led by then deputy governor Urjit Patel in February 2014. Though it had recommended a five-member committee where three members would be from RBI and two external members would be appointed by the RBI governor and the deputy governor in-charge.

It was also suggested that the governor should have a casting vote in case of a tie.



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