Ahead of the Reserve Bank of India’s keenly watched policy review, the finance ministry on Monday said it hadn’t planned to take away the power of the central bank’s governor...
Ahead of the Reserve Bank of India’s keenly watched policy review, the finance ministry on Monday said it hadn’t planned to take away the power of the central bank’s governor to set interest rates, hoping to end a controversy caused by a revised Indian Financial Code (IFC) draft put out by the ministry recently.
However, while finance secretary Rajiv Mehrishi said the government’s view on the composition and mode of functioning of the proposed Monetary Policy Committee (MPC) was yet to be firmed up (“It would be known when the IFC Bill is tabled in Parliament”) and asserted that the draft was merely a discussion paper for the public to comment on, he could not remove the veil over who exactly was responsible for the new proposal to remove the governor’s veto power in the MPC.
The mystery about the ownership of the proposal only intensified after Mehrishi’s press conference, which followed the disowning of the revised draft by both the Financial Sector Legislative Reforms Commission (FSLRC) chairman justice BN Srikrishna and its member M Govinda Rao.
“We (the ministry) did the task of collection and collation (of suggestions received). No decision has been taken (and) all the options (are) being discussed,” Mehrishi told media persons. Asked who owned the revised IFC draft, the official was evasive.
“People of India own the draft…(which) is still to be considered by the government as a discussion paper. So…to jump to a conclusion that some curtailment of the power of the RBI has been made or the government has decided to do so would be incorrect,” he added.
Curiously, chief economic adviser Arvind Subramanian had earlier said that the revised IFC draft was based on the FSLRC report.
In the IFC draft submitted to the finance ministry in March 2013, the FSLRC had proposed that the RBI governor could override the MPC under exceptional circumstances, even as the MPC would have two RBI members, two nominated by the government in consultation with the RBI and three directly appointed by the government. The new draft released by the ministry recently, however, removed this crucial veto power of the governor and virtually gave majority power to the government by suggesting it could appoint four of the seven MPC members.
While RBI governor Raghuram Rajan hasn’t made any comments on the composition of the MPC so far, Mehrishi said given the monetary policy framework agreement was signed between the RBI and the government in February 2015, an urgency was felt on the setting up of the MPC. “We are in discussion with the RBI on the form and manner of MPC. In fact, we have arrived at a position which has been largely agreed upon,” the finance secretary said. While the RBI governor has the final authority on setting interest rates, the MPC would be vested with this crucial power once it is formed.
The revised IFC draft will be open for comments until August 8.
In February, the government and the RBI signed a monetary policy framework agreement under which the central bank has been formally mandated to pursue “flexible inflation targeting”. Finance minister Arun Jaitley announced in Budget FY16 that the RBI Act would be amended to set up the MPC.
The apparent tiff between the RBI and the government on the proposed recast of the latter’s mandate surfaced in the past too. Faced with resistance from the RBI, Jaitley had to put in abeyance a plan to transfer regulation of government securities to market regulator Sebi and defer the setting up of an independent Public Debt Management Agency (PDMA). While dropping these proposals from the Finance Bill on April 30, he, however, reiterated that public debt management would have to be carved out of the RBI.
Tuesday’s monetary policy review comes when most analysts presume Rajan will hold rates and some hope for a cut of 25 basis points in the policy rate. The monsoon rainfall had been slightly better than anticipated at the time of the previous review on June 2, although the Met department on Monday retained the June prediction of rains being 12% lower than the long-period average. While lower-than-expected crude oil prices and slowing of industrial production growth to 2.8% in May are among factors that argue for a rate cut, the inching up of the consumer price inflation to 5.4% in June would also weigh on the RBI’s mind.
Urjit Patel Committee
* Apart from governor, 2 members from the RBI and 2 external members to be nominated by RBI FSLRC
* 7-member panel with 2 from RBI. Govt to appoint 2 members in consultation with RBI, 3 directly. Power with RBI since it can veto in exceptional circumstances IFC
* 7-member panel with 4 appointments by govt
* No veto for governor, casting vote to break a tie