Draft financial code: RBI governor may be striped off veto power in rate decision

Suggesting major reform in financial sector, the government on Thursday issued revised draft of the Indian Financial Code (IFC) which proposes a monetary policy committee headed by RBI ‘chairperson’ to decide on key interest rates by majority vote.

The draft also seeks to take away the veto power of the RBI chief while taking rate-related decisions, a proposal that is likely to pave the way for a confrontation with the central bank as it may curtail the powers of the governor.

It is to be noted that the draft talks of ‘RBI Chairperson’ and not ‘RBI Governor’.

“Decisions in a meeting of the Monetary Policy Committee must be taken by a majority vote of the members of the Monetary Policy Committee present and voting. 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 draft said.

Currently, the RBI Governor consults a Technical Advisory Committee (TAC), but does not necessarily go by the majority opinion while announcing monetary policy stance. While taking rate decisions in most of the TAC meetings, the governor has over-ruled the members’ suggestions. This is especially true when it comes to holding rates, withstanding the pressure from the industry and the government to take a contrary decision despite inflation ruling at elevated levels.

As per the IFC draft, the monetary policy committee will be headed by RBI Chairperson. The other members of the panel would be one executive member of the RBI Board, one employee of the RBI and four persons appointed by the central government.

As per the revised IFC draft, the RBI should chase the annual retail inflation target to be decided by the government in consultation with the central bank every three years.

“Inflation target for each financial year will be determined in terms of the Consumer Price Index by the Central Government in consultation with the RBI every three years,” said the draft on which the Finance Ministry has invited comments till August 8.

The IFC was suggested by the Financial Sector Legislative Reforms Commission (FSLRC), set up in 2011, for re-writing the financial sector laws to bring them in harmony with the current requirements. The Commission in March 2013 submitted its report in two volumes, which included the draft law.

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.

With inputs from PTI