The Modi government on Monday stepped back from the controversy surrounding the draft Indian Financial Code (IFC) that seeks to dilute the Reserve Bank’s powers to regulate the foreign exchange and government bond markets and set monetary policy.
Briefing reporters, Union Finance Secretary Rajiv Mehrishi disowned the proposals in the draft, saying they do not reflect the government’s views but his statement only served to further deepen the controversy.
“The people of India own the draft not the Government or the FSLRC [Financial Sector Legislative Reforms Commission]…we only compiled the suggestions received on the FSLRC recommendations,” Mr. Mehrishi said.
He was responding to reports in which the FSLRC head, Justice Srikrishna, categorically said: “The revised draft of the IFC is FSLRC’s recommendation as modified by the government of India…it is neither my view nor is it FSLRC’s view…it reflects the government’s view.”
The statements of Mr. Mehrishi and Justice Srikrishna imply nobody wants to take ownership of the proposals the Finance Ministry posted on its website for public comments.
Experts see bid to curb RBI’s powers
Union Finance Secretary Rajiv Mehrishi on Monday sought to blame the media for the controversy surrounding the Indian Financial Code draft proposals.
“An issue is being created by the media that someone’s trying to curtail the RBI’s role on monetary policy… Government has no view on any of the 400 sections in draft IFC….the Government’s view will be in the draft Bill as and when it goes to Parliament.”
He was briefing reporters on the draft. The draft IFC proposes, among other regulatory changes, the setting up of a Monetary Policy Committee that will set interest rates.
The Centre, says the draft, will appoint four out of seven members of this proposed Committee that will take decisions by majority vote. The draft also proposes to strip the RBI Governor’s veto over monetary policy decisions. It also proposes to take away from the RBI the role of regulation of the foreign exchange and the government securities markets, which in turn will reduce its leeway in managing the impact of capital flows.
Further, the draft IFC also proposes to strip the RBI of its registry and depository functions for government bonds markets and also to dilute its powers to regulate the banking sector.
These proposals have received sharp criticism from a range of former RBI officials and financial sector experts.
Moody’s Analytics, an arm of the global rating agency, said that moving to the IFC’s proposed model would severely dent the RBI’s competency.
“Credibility would be lower, politics would drive decisions, and transparency would be reduced…Overall, we believe that tampering with the central bank’s independence would make it difficult to anchor inflation expectations…This would weigh on India’s economic prospects, particularly financial market stability,” the report, titled ‘India Outlook: Waiting for Reforms to Fuel Growth’, Moody’s said.
