No veto power for RBI governor in deciding interest rates, says draft code

A panel on rewriting of financial laws has revised its suggestions on the proposed monetary policy committee (MPC), suggesting the Reserve Bank of India (RBI) governor shouldn't be vested with an overriding veto power in the seven-member committee on deciding the policy rate. This is at odds with its earlier draft, which had proposed entrusting the governor with such powers in case of a conflict with the view of most members of the MPC.

The revised draft on the Indian Financial Code (IFC) by the Financial Sector Legislative Reforms Commission (FSLRC) said, "Decisions at a meeting of the monetary policy committee must be taken by a majority vote of the members of the committee present and voting." The decisions would be binding on RBI, it added.

However, in case of a tie, the governor can cast a second vote. At least five members were required for a quorum, said the revised draft, put on the finance ministry's website on Thursday.

WHAT THE NEW DRAFT SAYS:

• The MPC will be chaired by the RBI governor
   
• It will also comprise a member of the RBI board and an RBI employee
   
• Decisions at MPC meetings will be taken by a majority vote of the members present and voting
   
• The previous draft had suggested the RBI governor have the power to supersede any MPC decision
   
• Each member of the MPC will have to state the reasons for voting in favour of or against proposed resolutions

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

A former central banker said if the RBI governor was to be responsible for meeting inflation targets, he should have veto power.

The new draft also refers to a different structure of the proposed MPC. It proposes the MPC have seven members, four appointed by the government. The committee is to be chaired by the RBI governor, in line with the recommendations of the first draft.

Besides the RBI governor as chairman and four government-appointed members, the committee would also comprise a member of the Reserve Bank board and an employee of the central bank.

While the executive member of the board would be appointed by the RBI board, the central bank employee will be chosen by the RBI governor.

The FSLRC's suggestion that four members of the committee be chosen by the government is contrary to the recommendation of a panel led by RBI Deputy Governor Urjit Patel. The Patel panel had recommended the MPC have five members, three from the central bank. It had also suggested the RBI governor be made the chairman of the MPC, the deputy governor in charge of monetary policy be made the vice-chairman, and the executive director in charge of monetary policy be a member. Two external members were to be decided by the chairman and vice-chairman on the basis of expertise in monetary economics, macroeconomics, central banking, financial markets, public finance and related areas.

The first draft had suggested besides the chairman and an executive member of the RBI board, two members were to be appointed by the government, in consultation with the RBI governor, and three members were to be selected by the government.

According to the FSLRC's revised draft, each member of the MPC will have to state the reasons for voting in favour of or against proposed resolutions.

Earlier, RBI and the finance ministry had reached an agreement to put in place a monetary policy framework to focus on flexible inflation targeting, which the central bank had been pressing for.

The Consumer Price Index (CPI)-based inflation targets --- below six per cent by January 2016 and four per cent from 2016-17 (+/- two per cent) --- are in line with the recommendations of the Patel panel.

According to the proposed IFC, if the inflation target isn't met, the central bank would give a report to the government on the reasons for the failure, the remedial measures proposed, and an estimated period within which the target would be met.

MPC members, who would serve for four years, should have the privileges accorded to an executive member of the RBI board.·And, the committee must meet at least once every two months, the revised draft said.

The draft also proposes setting up a financial authority to regulate all financial services other than banking and payment systems. The Reserve Bank would regulate banking, systemically important payment systems and authorised dealership, it said.

The revised draft contains a number of other key changes aimed at strengthening the regulatory accountability of financial agencies and taking away the regulatory review powers of the Financial Sector Appellate Tribunal (FSAT). On capital controls, the new draft said the central government must make rules in consultation with RBI. The objective, it said, was to facilitate capital account transactions in a manner that encouraged investment and economic growth in India.

Also, these could manage adverse short-term fluctuations in the balance of international payments and regulate capital account transactions that affected national security.

While making rules, the government must consider the principles that similar investments in India made by residents and non-residents must be treated “similarly” and “similar investments in India by non-residents from different jurisdictions, must be treated similarly”, it added.

The revised draft, released after comments on the original one, also said there should be no restrictions on current account transactions, while the government might impose prohibitions on capital account transactions on grounds such as national security, critical infrastructure and technology.

Talking about an accountability mechanism for financial agencies, it said every board must have an audit committee comprising at least two non executive members.

Further, the modifications have taken into consideration the enactments of and amendments to laws since the submission of the FSLRC report such as the Pension Fund Regulatory and Development Authority Act, 2013 (PFRDA Act) and Securities Laws (Amendment) Act, 2014.