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First Monetary Policy Committee rate call on October 4

The Reserve Bank of India (RBI) will unveil its first monetary policy that would be decided by the six-member Monetary Policy Committee (MPC) on October 4.

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The Reserve Bank of India (RBI) will unveil its first monetary policy that would be decided by the six-member Monetary Policy Committee (MPC) on October 4.

According to the Union Economic Affairs Secretary, Shaktikanta Das, the new committee, which has the mandate to decide on the interest rates, will meet before the Reserve Bank of India (RBI) policy review to jointly decide on whether interest rates need to be brought down.

"The MPC will, of course, meet before the fourth of October and the committee will give their recommendations based on which the RBI will take a decision," Das told reporters on the sidelines of a CII summit on ways to develop the bond market in the BRICS (Brazil, Russia, India, China, South Africa) group of emerging economies.

The current practice of the governor deciding on interest rates will be replaced by the consensus decision of the newly-formed committee.

The six-member MPC has three members from the RBI and the remaining from the government. Urjit Patel, the governor of RBI, Michael Patra, Executive Director, and R Gandhi, Deputy Governor in charge of monetary policy, will be the MPC members from the regulator's side. Chetan Ghate, professor at the Indian Statistical Institute, Pami Dua, Director, Delhi School of Economics, and Ravindra H Dholakia, Professor, IIM-Ahmedabad, have been appointed as the government nominees on the MPC on September 23. These members have been selected for a non-renewable period of four years.

The government has been amending the RBI Act by notifying the monetary policy agreement by giving RBI a target for inflation that is to keep the consumer price inflation at 4% with a variation of band of 2%. It has also stopped targeting the wholesale price inflation.

Das said more legislative changes are planned, adding that the "Indian bond market is in critical stage and more needs to be done for making it more vibrant. Global economic situation is volatile and the government is working on making some legislative changes to make the bond market vibrant".

Deepening the Indian bond market is a priority for the government, particularly in the face of increased challenges globally, said finance minister Arun Jaitley.

"Among the challenges is the increased evidence of protectionism among developed economies, that are again sending negative signals," Jaitley said addressing the summit.

Noting that banks' resources are constrained by the impact of slowdown in other sectors, Jaitley said the government has accepted "almost all the recommendations made by the Khan panel on corporate bonds".

The HR Khan Committee on corporate bond market had proposed last month that banks should be allowed to pledge corporate bonds as collateral to borrow funds from the RBI's overnight repo window.

At present, banks can only pledge government securities to borrow from the RBI, while allowing them to pledge corporate bonds could encourage more buying of the debt by lenders.

"To begin with, the RBI may consider accepting corporate bonds for overnight LAF (liquidity adjustment facility) operations as risks related to rating downgrade and change in market price of the underlying collateral would be minimal. Based on experience gained, it may be extended for long-term repos," the committee said in its report.

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