The Union government on Thursday proposed to strip the Reserve Bank Governor’s veto vote on India’s monetary policy. The government also proposed to grant itself the power to appoint four of the six members of the Monetary Policy Committee, whose remit will include decisions on setting interest rates to maintain inflation at the targeted level.
The revised draft of the Indian Financial Code, put out by the Union Finance Ministry for comments, proposes that the Reserve Bank “Chairperson” shall head the committee, with no reference to the Governor. It is not clear from the draft if a re-designation is planned.
An earlier draft had proposed to give the Governor the right to overrule the monetary policy committee decision. If the inflation target is not met, then the Reserve Bank will have to explain the reasons and propose remedial actions.
Under the revised draft, the non-government members of the committee are to be drawn from the Reserve Bank.
The Reserve Bank’s Board will nominate one of its executives as the fifth member of the committee. The “Chairperson” will nominate one of its employees as the sixth member.
The move comes in the wake of a severe breakdown of talks between the Centre and the Reserve Bank over amendments to the RBI Act, which Finance Minister Arun Jaitley had announced in his Budget speech.
Seeing the Reserve Bank’s opposition to them, the Finance Minister later dropped the proposed amendments from the Finance Bill.
The Reserve Bank has rejected the Union Finance Ministry’s “diluted” proposal for a non-statutory Public Debt Management Authority, and instead proposed a public debt management cell to be headed by the Finance Secretary.
A top government source told The Hindu that Finance Secretary Rajiv Mehrishi and other Ministry officials decided not to go to Mumbai for high-level meetings with Reserve Bank authorities Reserve Bank Deputy Governor H.R. Khan wrote to the Ministry about the proposal. The differences between the two sides have become so stark the meetings were cancelled at the last minute twice.
One of the proposed amendments Finance Minister Arun Jaitley had dropped from the Finance Bill was to set up the authority as a statutory body for managing the debt issued by the Union government, a job currently handled by the Reserve Bank.
On Tuesday, Reserve Bank Governor Raghuram Rajan called on Union Finance Minister Arun Jaitley.
Still, in Thursday’s revised draft of the Indian Financial Code, the Ministry proposed that the Monetary Policy Committee decisions would be by majority vote with one vote per member.
“In the event of a tie among the members of the monetary policy committee, the Reserve Bank ‘Chairperson’ will have a second and casting vote,” the draft says. It also proposed that a representative of the Centre will participate in the committee’s deliberations, but will not be entitled to vote.
The Ministry has sought comments on the draft by August 8.
