Govt proposes curtailing RBI guv's role in deciding interest rates

  • HT Correspondent, Hindustan Times, New Delhi
  • Updated: Jul 23, 2015 22:46 IST

The government has proposed to effectively take away the Reserve Bank of India (RBI) governor’s overriding powers on interest rate decisions, a move that could dilute the central bank’s status as an independent and autonomous monetary authority.

The government instead has proposed to give an additional vote to the RBI governor in case of a tie in any meetings of a yet-to-be set up monetary policy committee that will decide on interest rate hikes and cuts.

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

The ministry has sought further comments from public by August 8.

The government is likely to follow this up by moving to enact a an Indian Financial Code (IFC) Bill that will subsume more than 60 archaic legislations to make them contemporary.

The IFC is based on the recommendations of the Financial Sector Legislative Reforms Commission (FSLRC) under Justice B.N.Srikrishna

The first draft IFC report submitted in 2013 had proposed giving the RBI governor the right to supersede decisions if the central bank chief disagrees with the monetary policy committee.

“If the Reserve Bank chairperson exercises the right, an explanatory statement must be submitted by the Reserve Bank chairperson to the central government on the same day when the meeting where such right was exercised is held,” the first draft had said.

The revised draft, however, had dropped this clause and instead offers a casting vote to the RBI chief in the event of a tie.

“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 revised IFC draft has retained the total number of members of the monetary policy committee at seven, including the RBI governor.

In February, the RBI and the government had formally adopted a monetary policy framework, which will make taming inflation the primary priority of the central bank’s policy decisions.

Under the new system, the RBI will set a new retail inflation target of below 6% by January 2016 and 4% by March 2017.

While the old IFC draft proposed two members to be appointed by the government in consultation with the RBI apart from three that it can appoint, the new draft proposes that government can appoint four members in the committee of its own while the RBI governor can appoint one of RBI’s employees to the committee.

The Finance Ministry while revising the draft has also suggested modifications with regards regulatory accountability of financial agencies, capital controls and regulation of systematically important payment system, among others.

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