Budget 2016: Govt to amend RBI Act to add monetary policy framework

The government will table a comprehensive bankruptcy code, to aid speedy recovery of bad assets, and amend the Reserve Bank of India Act to add monetary policy framework and monetary policy committee in fiscal 2016-17, Finance Minister Arun Jaitley said in his Budget speech.

The addition of monetary policy framework and committee will add "lot of value and transparency," Jaitley said.  
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Under the framework, RBI will be responsible for meeting inflation targets, which the central bank expects to contain at 4% (with a standard deviation of 2%) in the medium term.

The central bank already follows the monetary policy framework, but adding it in the statute will mean that the RBI will be accountable under the statute and will have to explain why it failed to meet its inflation targets.

However, the government has not spelled out the membership of the monetary policy committee as yet and analysts would be keenly watching this space. A draft last year proposed that  RBI governor be stripped out his veto power on deciding monetary policy, even as most of the members of the seven member committee be government appointed.

However, the government rather clarified that that was a draft and there would be equal share of members from the government and the central bank with RBI governor being the head of the committee.

The Budget also empowered the Asset Reconstruction Companies (ARCs) by proposing to amend Sarfaesi ACT to allow sponsors to hold 100% equity stake in the ARCs. Non-institutional investors will be allowed to invest 100% in security receipts, increasing the investor base, Jaitley said.