The Reserve Bank of India’s (RBI) Governors always had the privilege of independent decision-making on issues related to monetary policies, which helped the Indian economy for a long time. Even at times of major financial crisis crippling the global economy, the RBI Governor’s decisions - sometimes in co-ordination with the Government and sometimes not in consonance with the government’s views - had helped the Nation.
As per the new draft of the revised proposal for Indian Financial Code (IFC), which would replace the multiple laws – some of them framed even before the independent India - governing the Indian financial sector, the central bank Governor will not have the veto power over the interest rates.
Moreover, the Government will have the power to appoint a majority of the members of the proposed monetary policy committee of the central bank.
Though the government is trying to clarify that the RBI’s independent decisions on monetary policies would not be diluted, in short, the Government is proposing a bill to have greater say in RBI’s rate decision-making.
The new financial code also proposes a frame-work for inflation-targeting under which the Government and the central bank together will set the target.
“The interest rate decision should lie with the RBI,” says D.K. Joshi, Chief Economist, Crisil, a leading rating agency. According to him, “the RBI needs enough autonomy to be accountable.”
However, another school of thought on markets believes differently. “While foreign investors are nervous about politicians preferring loose monetary policies instead of tight policies of independent RBI, I don’t see much problem with a good balance between Government and RBI,” says Samir Lodha, Managing Director, QuantArt, a foreign exchange advisory firm.
“A good balance between inflation and growth is required as well and most people will agree that RBI has been behind the curve,” says Mr. Lodha.
According to him, the economy needs a good booster of rate cut to kick-start manufacturing, capex cycle, infrastructure investments, job creation etc and also to compete in an environment of slowing global demand. He believes that the Government is answerable for employment and inflation and hence “I do not see much problem if there is a balance between RBI and government in monetary policy decision making.”
“This could have positive reaction from the stock markets as the market can hope for aggressive rate cuts. We heard many times in the past that majority’s views being less hawkish on benchmark interest rates,” says G. Chokkalingam, Founder & Managing Director, Equinomics Research and Advisory Pvt. Ltd. Moreover, says Mr. Chokkalingam, while the Governor’s focus has been excessively on inflationary threat, the government has been worried a lot on the growth story as the industrial economy is in near stagnation for nearly two years. In fact, most major economies in the world are worried about deflationary pressures rather than the inflationary threat.
In this background, on the issue of inflation versus growth, a larger number of decision-makers taking more proactive initiatives in favour of growth have a higher probability than a single decision-maker who is known for worrying a lot on inflation. Therefore, “we believe that the markets may react positively to this development,” Mr. Chokkalingam adds.
