Clipping RBI chief's veto not an FSLRC proposal: Member

Finance Minister Arun Jaitley had said the revised IFC draft was according to FSLRC report

A Financial Sector Legislative Reforms Commission (FSLRC) member has said the draft Bill seeking to clip the Reserve Bank of India (RBI) chief’s veto in deciding interest rates does not reflect the views of the panel.

The revised draft of the Indian Financial Code (IFC), which proposes any monetary decision should be taken by majority by a seven-member committee without any veto power to the RBI chief, has created a furore and was seen as an attempt to curtail the central bank’s autonomy. This prompted the government to claim the draft IFC was not a “report of the government or of the finance ministry’ and was based on the FSLRC report. “It is not true,” FSLRC Member M Govinda Rao said.

“There is a misconception that the revised draft of IFC is a report of FSLRC. But that is not true. The term of the FSLRC ended in 2013,” Rao said. He also said the RBI governor should indeed have a veto power in the monetary policy. Rao’s comments are in sharp contract to statements by Finance Minister Arun Jaitley and other senior officials including Chief Economic Advisor Arvind Subramanian, who have said the revised IFC draft was according to FSLRC recommendations.

While the first version of IFC, as recommended by the FSLRC in March 2013, had also suggested a Monetary Policy Committee (MPC) to decide on rates, it had recommended a veto for the central bank chief.

The revised draft, released by the finance ministry last month on July 23 for public comments till August 8, has suggested doing away with this veto power and wants the seven-member MPC to take decisions by a majority vote. The new version, which has been prepared after taking into account comments from various stakeholders on the first draft, has proposed three members from RBI (including its chief) and four to be nominated by the government.

Following criticism, Jaitley had said, “FSLRC has made its recommendations, which have been made public for comments. After the comments are received, it is only then that the government will take a view.” Subramanian also said, “ FSLRC report is a report of the FSLRC. It is not the report of the government or the finance ministry. The report is not the view of the government.”

Seeking to clear the air, Rao said FSLRC had not recommended dilution of the powers of the RBI governor in deciding policy rates. “Once you assign the responsibility of price stability or inflation targeting to RBI, it follows that the governor should have full say in deciding the interest rate,” he said.

He further said the mandate of the committee should be to assist RBI in deciding the policy and it was important that the governor retains veto power in deciding the monetary policy action.

“There is a specific role of RBI and the FSLRC recommendation took that into account. The governor should have the power to decide on monetary policy action and I hold on to that view,” the FSLRC member said.

Currently, the RBI governor consults a Technical Advisory Committee, but does not necessarily go by the majority opinion while deciding on the policy stance. There have been multiple occasions when the RBI chief has actually gone against the majority view of this committee.

A former RBI governor also criticised the revised IFC draft, saying it would take away powers of the central bank chief to take tough actions against those with political backing.

“Inflation management and credit decisions should be at the arm's length from the government. The responsibility should vest with the RBI. But the decisions should be taken in concurrence with the government,” said the former governor who did not want to be named.

FSLRC, which was set up in 2011 to review and rewrite the laws of the Indian financial sector, had submitted its report to the then Finance Minister P Chidambaram in March 2013. It was headed by Justice B N Srikrishna and members included Rao, Y H Malegam, K J Udeshi, Jayanth Varma and P J Nayak.

The FSLRC report was in two parts — first focusing on "Analysis and Recommendations" and the second on 'draft laws' consisting of the first draft IFC.

The report, along with the draft IFC, was put up for public comments on March 28, 2013. Further, comm-ents were requested from various ministries, departments and regulators, as also from the state governments, universities and research institutions among others.

Subsequently, the Draft IFC was "revised in the light of the comments received" on the earlier draft, Finance Ministry had said while releasing the revised version last month.

Among others, modifications relate to "monetary policy framework and composition of the Monetary Policy Committee," the Ministry said.