Still, in Thursday’s revised draft of the Indian Financial Code, the Ministry proposed that the Monetary Policy Committee decisions would be by majority vote with one vote per member.
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The revised draft has given the government all powers to frame rules on cross-border capital flows while RBI will be implementing the same.
“In exceptional and unusual circumstances, if the RBI Chairperson disagrees with a decision taken at a meeting of the Monetary Policy Committee, the RBI Chairperson will have the right to supersede such decision”, the first draft said.
Former Reserve Bank of India governor Chakravarthi Rangarajan criticised a government move that proposes to give majority control of a monetary policy committee (MPC) to its nominees, and questioned how the central bank would successfully meet its inflation targets without control over it. It was to have one executive member from the board of the central bank and five external members to be appointed by central government of which two would be in consultation with the chairperson. But, my own suggestion is the committee should be constituted out of only the RBI board because the board is also constituted by the government. But it is clear that the RBI will be pressured to adopt measures to help the government achieve its responsibility of cranking up economic growth.
“After buying into India given the way RBI has managed inflation, forex market, foreign investors will be anxious about the credibility of the decision-making process if the government has a bigger say than the RBI”, one foreign bank trader said.
“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”. Governor Rajan, although front-loaded interest rate cuts in June policy by a 25-basis point repo rate reduction, said that the government needs to reciprocate by “strong” food policy management, higher public spending and recapitalisation of banks.
The revised IFC has no provision of a veto from the RBI Governor and focuses on the decision taken by the majority.
RBI also will not remain an independent agency, which monitors the economy and sets its policy but will become an extension of the government.
However, the genesis of the issue can be traced to the previous government that sought a cut in interest rates to support the crumbling economy. But it had provided for five external members, two of whom were to be appointed in consultation with the RBI governor.
This is through its recommendation that the government will have power to appoint majority of members of MPC.
The revised draft of the Indian Financial Code, put out by the Union Finance Ministry for comments, proposes that the Reserve Bank “Chairperson” shall head the committee, with no reference to the Governor.
The new draft also proposes to remove the provision empowering Financial Sector Appellate Tribunal (FSAT) to review regulations.
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Further the modifications have taken into consideration the enactments subsequent to the submission of the FSLRC report, namely The Pension Fund Regulatory and Development Authority Act, 2013 (PFRDA Act) and Securities Laws (Amendment) Act, 2014.
