Financial code to enable shift from present system of RBI governor solely deciding monetary policy actions
The proposed Monetary Policy Committee (MPC) will have three members from the RBI instead of two proposed earlier, under a revised draft of the Indian Financial Code (IFC) released by the finance ministry on Thursday.
The code, supposed to be sector-neutral legislation for the entire financial sector, would enable a shift from the present system of the Reserve Bank of India (RBI) governor solely deciding the monetary policy actions such as interest rate to one where an MPC would take such decisions by majority.
The first draft code, which was submitted by the Financial Sector Regulatory Reforms Commission (FSLRC) in March 22, 2013, had suggested that the seven-member MPC would be headed by the RBI chairperson (governor) and would include another executive member from the central bank’s board. It had also said that the government would appoint three members directly and another two in consultation with the RBI.
As per the revised draft, the MPC would be headed by the RBI chairperson and would include an executive member of its board and one of its employees nominated by the chairperson. The government would appoint four members in the MPC.
The government and the RBI have already signed a Monetary Policy Framework Agreement earlier this year, formally mandating the central bank to adopt flexible inflation targeting. Pending the approval of the IFC, the government had plans to bring an amendment to the RBI Act to give authority to the MPC on monetary policy.
However, differences with the RBI on the composition of the MPC has forced the government to delay the plan till next year.
The government plans to introduce the IFC in the winter session of Parliament.
The other modifications done to the draft code mainly relate to the strengthening of the regulatory accountability of financial agencies; removing the provision empowering the Financial Sector Appellate Tribunal to review regulations; rule-making and operational aspects of capital controls; monetary policy framework and composition of the MPC; regulation of systematically important payment system and others; and removing the provision of special guidance, among others.
However, the modifications in the revised draft IFC remain consistent with the overall structure and philosophy of the FSLRC report. The finance ministry has invited stakeholders comments on it latest by August 8.