NEW DELHI: India is embarking on steps that will lead to the government agreeing to inflation targeting while monetary policy will be decided by a committee, in line with systems in the US and the UK, and marking the start of sweeping changes in the financial sector.The finance ministry has begun discussions with the Reserve Bank of India on an agreement to put in place the framework that's needed along the lines of high-level panels such as the Urjit Patel committee and the BN Srikrishna-headed Financial Sector Legislative Reforms Commission.The agreement will lead to creation of a committee to set monetary policy that will be geared to an inflation target. The contours of this plan will be made public so views can be sought before an accord is signed.“Discussions are on with the RBI,” said a finance ministry official, adding that the government is keen to have the framework in place soon.The government had made its intentions clear in the July 10 budget presented by finance minister Arun Jaitley. “It is... essential to have a modern monetary policy framework to meet the challenge of an increasingly complex economy,” Jaitley had said. “The government will, in close consultation with the RBI, put in place such a framework.” The FSLRC had suggested setting up a fivemember monetary policy committee headed by the governor.RBI governor Raghuram Rajan has said previously that Parliament should set the inflation target and the central bank should be mandated to achieve this.Having a committee system in place would mark a radical shift in the way monetary policy is decided in the country. Currently, the governor is the sole authority to decide policy and the RBI board only has an advisory role. Following the change, policy will be decided by the proposed committee chaired by the governor through a vote.The agreement is being proposed in the interim pending legislative changes on the lines of the 1997 deal between the RBI and the government to end the issuance of ad hoc treasury bills to finance budget deficits and replace that with the scheme of ways and means advances. Incidentally, the RBI has adopted inflation targeting as a basis of its monetary policy.The consultations follow criticism of some FSLRC recommendations by Rajan and experts say it will be interesting to see what tack the central bank adopts in these early talks. The framework is being designed on the model followed in countries such as the US and the UK. In the latter, the treasury sets the remit of the monetary policy in discussion with the central bank, while decisions on policy are taken by a committee.The proposed framework draws from the work of a number of expert committees on financial sector reforms including the highpowered expert committee on making Mumbai an international financial centre (IFC) and the Rajan panel on financial sector reforms, besides the Patel panel and the FSLRC. The new framework agreement would come into effect from a date decided by the RBI, the official said.The Patel committee to revise and strengthen the monetary policy framework mooted a shift to the Consumer Price Index as the nominal anchor for inflation targeting and the setting up of a monetary policy committee headed by the governor with rate action decided by votes, the model followed by the US Federal Reserve. The FSLRC has recommended that price stability is a desirable goal in its own right, particularly in India, where inflation is known to hurt the poor and therefore the central bank must be given a quantitative objective that can be monitored by the central government for its monetary policy function.The Rajan panel had said the RBI can best serve the cause of growth by focusing on controlling inflation, and intervening in currency markets only to limit excessive volatility. This focus can also best serve the cause of inclusion because the poorer sections are least hedged against inflation.The RBI should formally have a single objective to stay close to a low inflation number, or within a range in the medium term, and move steadily to a single instrument, the short-term interest rate (the repo and reverse repo) to achieve this. The Mumbai IFC panel had said the gold standard for a monetary policy framework was a transparent, independent, inflation-targeting central bank.Experts said the move marks a significant step in the direction of financial sector reforms. “This is a move towards modernising the monetary policy,” said DK Joshi, chief economist at Crisil. “It would bring more clarity in the policy.”