Draft financial code proposes committee on policy rate

It has also discarded the veto power of the RBI Governor.

At stake is the RBI’s independence, which isn’t enshrined in its 1930s founding charter.

The displeasure of the finance ministry was visible after the policy announcement.

The GDP growth in the year ended March 31 was estimated at 7.4 per cent under a revised methodology for national accounts adopted in January.

The draft IFC guidelines which tilts the scales in favour of the government in deciding the future course of monetary policy, is based on the recommendations of the Financial Sector Legislative Reforms Council (FSLRC), headed by former Supreme Court judge.

Modi Government which has been facing flak for meddling into number of recent matters, is likely to face Opposition’s ire once again. Under the existing system, RBI governor is the final authority on money policy. Despite the majority for the cut in rates, Rajan exercised his power and maintained status-quo.

A dual mandate for the RBI will mirror the one that the US Congress set for the Federal Reserve in 1977.

There is already a tension between the monetary and fiscal authorities over interest rate cut. The Fed tracks the twin objectives by relying on inflation and unemployment data.

These proposals are part of the revised draft Indian Financial Code (IFC) that the finance ministry put out.

“There has been no formal discussion with the RBI on this report”, said the government official.

Urjit Patel committee report also commented the formation of MPC.

The Finance Ministry on Friday sought to distance itself from the revised draft of the Indian Financial Code, which proposes to dilute powers of RBI chief, saying it does not reflect views of the government.

In the UK, similarly, the majority on the monetary policy committee are appointees of the Bank of England. Of the external ones, 2 would be appointed in consultation with RBI and 3 others exclusively by the government – while the RBI Governor would have a veto in the FSLRC model, this would be under extreme circumstances and would have to be accompanied by a written explanation. The four others will be nominated by the Centre.

If there is an RBI majority in the committee, there is no question of a veto.

“In the event of a tie amongst the members of the Monetary Policy Committee, the Reserve Bank Chairperson will have a second and casting vote”. The government will have the powers to appoint four persons to the panel without consulting RBI. Inflation targeting is a monetary policy in which a central bank has an explicit target inflation rate for the medium term and announces this inflation target to the public.

Latha: The other point is you said if at all there is a committee, would you prefer a committee approach to monetary policy making or the single man approach that we have had all these years?

Under the monetary policy framework hammered out earlier this year, it was agreed that the RBI Governor would explain the reasons for not meeting inflation targets.

Things began to look worrying when the FSLRC recommended a 7-member MPC with just 2 RBI members and 5 external ones. It also proposed that a representative of the Centre will participate in the committee’s deliberations, but will not be entitled to vote.