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RBI could lose veto on interest rates under new financial code

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Governor can’t supersede RBI-govt joint panel’s decisions, can only cast vote in the event of a tie
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, which 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 which 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 BN 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 RBI chairperson exercises the right, an explanatory statement must be submitted by the RBI 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, it said.
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.
The finance ministry has also suggested modifications regarding regulatory accountability of financial agencies, capital controls and regulation of systematically important payment system, among others, in the new draft.
Hindustan Times, New Delhi, 24th July 2015

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