The idea to take away the veto power of the RBI Governor proposed in the revised draft of the Indian Financial Code (IFC) is a bad one. Playing with the RBI’s independence is a dangerous proposition. If there has been no major fiasco in the Indian banking system, the credit has to go to the independence that it enjoys.
Whenever there has been a crisis situation, domestic or global, the central bank has successfully handled it because the political system could not influence RBI Governor.
This, at times, though, in the last few years, has given rise to a situation where the government of the day and the RBI Governor appeared to be in confrontation with each-other in taking measures to control inflation or spur growth.
So, there has been a try to find a way out to make the government and the RBI thought processes compatible. But, achieving this by clipping the wings of the RBI Governor will give rise to more problems than solving one.
If the RBI Governor doesn’t agree with what the government wants in the short-run, it is because the apex bank’s job is to also look at medium-term and long-term objectives and outcomes and ensure certainty and stability in the monetary policy. This should not be taken as an obstruction to growth.
There is no doubt that the action of the central bank should be scrutinized by Parliament on a continuous basis and the RBI should be following a growth path fixed by Parliament but, the government taking control of the bank could be disastrous.
The revised IFC draft released by the finance ministry has proposed that the monetary policy committee (MPC) of RBI that is responsible for taking the interest rate decisions would have four representatives of the government and only three from the central bank, including the ‘RBI Chairperson’ and the chairperson will have no veto power.
At present, the RBI Governor rules the decisions and he is the final authority in taking any decision.
The revised draft code has outlined that:
(1) The Reserve Bank must constitute a Monetary Policy Committee to determine by majority vote, the Policy Rate required to achieve the inflation target.
(2) The Monetary Policy Committee will comprise – (a) the Reserve Bank Chairperson as its chairperson; (b) one executive member of the Reserve Bank Board nominated by the Reserve Bank Board; (c) one employee of the Reserve Bank nominated by the Reserve Bank Chairperson; and (d) four persons appointed by the Central Government. (Read full revised draft code: Indian Financial Code)
The RBI Governor currently consults a Technical Advisory Committee, but he has the veto power in deciding rates, and the initial IFC draft had ensured that the power remains with the Governor.
The NDA government would do well by taking a long-term view and treading cautiously in implementing the IFC.