Business Today

RBI Governor may lose veto power in deciding key interest rates

The revised draft of Indian Financial Code (IFC), released by the finance ministry, proposed taking away the RBI Governor's authority to veto the interest rate decision of the Central bank's monetary policy committee.

Mail Today Bureau   New Delhi     Last Updated: July 24, 2015  | 11:48 IST
Union finance minister Arun Jaitley and RBI Governor Raghuram Rajan
Union finance minister Arun Jaitley and RBI Governor Raghuram Rajan

In what looks like another sign of increasing differences between the government and the Reserve Bank of India (RBI) governor, the revised draft of Indian Financial Code (IFC), released by the finance ministry on Thursday, proposed taking away the chief's authority to veto the interest rate decision of the Central bank's monetary policy committee.

Besides, the draft proposed that the all-powerful committee would have four representatives of the government and only three from the Central bank, including the 'RBI chairperson'. The draft talks of 'RBI Chairperson' and not 'RBI Governor'.

Currently, the governor consults a technical advisory committee, but does not necessarily go by the majority opinion while deciding on the monetary policy stance.

The first draft, submitted in March 2013, too had talked about the committee and majority vote, but gave powers to the RBI chairperson to supersede the decision of the panel.

The IFC, which is conceived as an overarching legislation for the financial sector, proposes a monetary policy committee which will be entrusted with the task of deciding the key policy rate and chasing the annual retail inflation target to be decided by the government in consultation with the RBI.

"Inflation target for each financial year will be determined in terms of the consumer price index by the Central government in consultation with the Reserve Bank every three years," said the draft, on which the ministry has invited comments till August 8.

Further, the RBI "must constitute a monetary policy committee to determine by majority vote on the policy rate required to achieve the inflation target". As per revised draft, there will be three members from the RBI side and four from the Central government thus giving full control to the government on policy rate.

The government and the RBI had always disagreed over size of the committee, its composition and whether the governor would have the final say in the form of a veto.

"Conflict between the RBI and finance ministry cannot be ruled out," one ministry official had told news agency Reuters in March. "A government's active role in monetary policymaking risks undermining the Central bank's independence and might result in conflict of interests in terms of broader economic priorities," Radhika Rao, economist, DBS, Singapore, had told Reuters.

Youtube
  • Print

  • COMMENT
BT-Story-Page-B.gif
A    A   A
close