Revised Financial Code Draft Eroding The Autonomy Of RBI

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Revised Financial Code Draft Eroding

• The Autonomy Of RBI

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Corporate Lawyer

• Last week, the Union finance ministry issued a
  fresh draft of the Indian Financial Code (IFC),
  which became the subject of controversy due to
  its provisions on fiscal policy. It received the
  greatest ire of critics as it projected
  government dominated monetary policy committee
  (MPC), which will take away the power of the
  Governor of the Reserve Bank of India in
  determining the policy rates. Moreover, as per
  the recently created draft, the RBI chairperson
  will only get a second and casting vote if the
  Monetary Policy Committee members are unable to
  arrive at a decision. And four out of seven
  members of the MPC will be appointed by the union
  government. Thus, the new draft bill of IFC on
  limiting the powers of the central bank governor
  is severely criticized.

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Corporate Lawyer

• Some of the loudest critics of the draft believe
  that such monetary policy changes will undermine
  the autonomy of the central bank. A new model
  will dilute RBIs power. Interfering with RBIs
  independence would reduce the transparency and
  lower the trustworthiness which would ultimately
  affect the growth prospects of the Indian
  economy, especially financial market stability.
  While, there are some experts who see it as a big
  shift from the present system, which gives too
  much authority to the governor of central bank,
  to a more viable system.

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Corporate Lawyer

• The RBI and the government have been combating
  for a long time on how policy interest rates
  should respond to inflation. During the
  governance of UPA, the finance ministry
  frequently nudged the central bank to reduce
  interest rates. UPA govt. was in belief that it
  will help improving the economic growth, but the
  RBI denied obliging, creating unprecedented
  tension. Now, after so many controversies on the
  revised draft by Financial Sector Legislative
  Reforms Commission (FSLRC), the finance ministry
  is distancing itself from it saying it does not
  reflect views of the government.
• Finance Minister Arun Jaitley said to reporters
  inside the Parliament campus, FSLRC has made its
  recommendations, which have been made public for
  comments. After the comments are received, it is
  only then that the government will take a view.

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Corporate Lawyer

• While, one of the members of FSLRC, M Govinda Rao
  explained that the revised draft of IFC is not
  the report of the commission. He further stated
  that the governor of the central bank should have
  full say in determining the interest rates.
• The Raos clarification contradicts the finance
  ministrys earlier defence that they have not
  attempted to take over the autonomy of the
  central bank in setting monetary policy. It
  conclusively confirms that there is certainly an
  attempt for the government to seize control of
  monetary policy of the central bank.
• The Corporate Lawyer Kislay Pandey said, Despite
  of diluting the powers of RBI, the Government can
  conduct the monetary policy function taking
  parliament into confidence and set the inflation
  target or growth/employment target on central
  bank and the RBI will be held responsible to
  attain these objectives.

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Corporate Lawyer

• As per the envisaged budget, the powers of RBI
  can be diluted in the future when one of the
  vital functions of RBI-debt management- will be
  moved to a completely different debt management
  agency. However, it is clear that governor of RBI
  will have the absolute power in the new monetary
  policy agenda. And, it will be significant to see
  how much this power works in the favour of
  central bank, given that the Government is the
  head of the RBI.