Bill to reform how India sets monetary policy moves closer to passage

Reuters

Published May 05, 2016 10:09AM ET

Bill to reform how India sets monetary policy moves closer to passage

NEW DELHI (Reuters) - India moved closer to changing how interest rates are set and monetary policy conducted as the lower house of parliament on Thursday approved legislation giving the central bank a mandate to target inflation.

The Finance Bill, passed by a voice vote, will next go to the upper house, which is widely expected to pass it.

The bill, which mainly contains tax proposals, seeks to set up a monetary policy panel that will set interest rates through a majority vote, a practice followed by major central banks globally.

At present, Raghuram Rajan, the governor of the Reserve Bank of India (RBI), is the sole authority to decide monetary policy, with assistance from a panel that has no voting powers and is purely advisory.

Finance Minister Arun Jaitley told lawmakers the planned six-member policy panel would include three representatives from the government, and three from the central bank, with a casting vote for Rajan in the event of a tie.

The inflation target of the RBI would be reviewed once every five years, Jaitley said.

The passing of the bill in the lower house is a big boost for Rajan, who, since taking office in 2013, has been trying to align the manner in which India sets monetary policy with that of central banks in developed economies.