The draft reads, "In the event of a tie amongst the members of the Monetary Policy Committee, the Reserve Bank Chairperson will have a second and casting vote," adding, "The decisions of the Monetary Policy Committee will be binding on the Reserve Bank."
The revised draft of the Indian Financial Code (IFC) has clearly told the Reserve Bank of India (RBI) that only its view on the economy will sustain.
The draft reads, "In the event of a tie amongst the members of the Monetary Policy Committee, the Reserve Bank Chairperson will have a second and casting vote," adding, "The decisions of the Monetary Policy Committee will be binding on the Reserve Bank."
However, Arvind Subramanian, chief economic adviser to the Indian Government tried to fire-fight late on Friday when he said that the revised draft is not the view of the Indian Government.
He said, "FSLRC is a report of the FSLRC. It is not a report of the government or the finance ministry. The report is not a view of the government."
Till now, a technical advisory committee (TAC) used to advise the Governor on the state of the economy and the course of action the Central Bank should take. However, the final decision always was with the Governor.
This was recently seen during the first bi-monthly monetary policy this year when Raghuram Rajan, Governor, RBI did not go with the advise of the TAC.
Out of the seven member-committee, four were of the view that the RBI should increase interest rates. Two of those suggested a 50 basis points increase and two wanted 25 basis points hike.
Three members did not want any increase. Despite the majority for the cut in rates, Rajan exercised his power and maintained status-quo. The Central Bank did not increase interest rates in its first bi-monthly policy.
The government, however, had been asking the RBI to cut rates and help the economy revive.
The displeasure of the finance ministry was visible after the policy announcement.
This discretion, if the IFC becomes a Bill in its current form, will be snatched away from the RBI Governor.
The revised IFC has no provision of a veto from the RBI Governor and focuses on the decision taken by the majority.
RBI will not remain an independent agency which monitors the economy and sets its policy but will become an extension of the government.
Centre, with its power to appoint four members on the seven-member Monetary Policy Committee (MPC), will effectively control the interest rates policy.
The other members of the MPC would be: RBI Chairperson, one executive member of the Reserve Bank Board nominted by the Central Bank and one employee of the Central Bank nomited by the Chairperson of the RBI.
The revised IFC has no mention of the veto power that rests with the RBI Governor. It now states that the the Bank has to go with the majority decision of the MPC. However, in case of a tie, the Governor has the right to a second vote which will effectively decide the policy action. The draft Bill states, "Decisions in a meeting of the Monetary Policy Committee must be taken by a majority vote of the members of the Monetary Policy Committee present and voting."
But, Monetary Policy being the main focus of the Central Bank, surrendering it to the government is a hefty blow to the independence of the RBI.
C Rangarajan, the former governor of the RBI, too, came out in defence of the RBI's power to set monetary policy to tackle inflation. He said that the power to decide on key rates must remain with the RBI.
He asked on CNBC TV18, "How will RBI target inflation without power?"
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