Ahead of monetary policy meet on Aug 4, Raghuram Rajan meets Arun Jaitley

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New Delhi | Published: August 1, 2015 8:11:05 AM

The meeting comes just days after the finance ministry released a revised draft of the Indian Financial Code that would reduce the central bank’s powers to decide the monetary policy stance.

RAGHURAM RAJANThe meeting comes just days after the finance ministry released a revised draft of the Indian Financial Code that would reduce the central bank’s powers to decide the monetary policy stance. (PTI)

Ahead of the third bi-monthly monetary policy review on August 4, Reserve Bank of India (RBI) governor Raghuram Rajan met finance minister Arun Jaitley on Friday.

The meeting, which was a customary call by the RBI governor before a policy review to discuss the macro-economic situation, comes just days after the finance ministry released a revised draft of the Indian Financial Code that would reduce the central bank’s powers to decide the monetary policy stance.

Rajan, however, refrained from commenting on the meeting but welcomed the capital infusion plan for public sector banks that was outlined by the finance ministry.

However, while the finance minister had said the government would consult all stakeholders before finalising its views, the research arm of global rating agency Moody’s has warned that curbing RBI’s autonomy on rates could have repercussions on the economy.

“Overall, we believe that tampering with the central bank’s independence would make it difficult to anchor inflation expectations. This would weigh on India’s economic prospects, particularly financial market stability,” Moody’s Analytics said in a report titled India’s Outlook: Waiting for Reforms to Fuel Growth.

Noting that inflation has eased, external accounts have improved and the economy is poised for further rate cuts, it however warned that “a recent draft bill could undo the RBI’s good work”. “Overall, India’s monetary policy, with governor Raghuram Rajan at the helm, has been effective,” it stressed.

The report hoped that the draft IFC is unlikely to pass in Parliament given the criticism surrounding it.

The revised draft of the IFC has proposed that while inflation targeting would be the key responsibility of the monetary policy committee, which would be headed by the RBI “chairperson”, the central bank governor would not have a veto power on key rates. Instead, it has suggested that a decision on key interest rates would be taken by the committee through majority vote.

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