New Delhi: Suggesting major reform in financial sector, the government today issued revised draft of the Indian Financial Code (IFC) which proposes a monetary policy committee headed by RBI ‘chairperson’ to decide on key interest rates by majority vote. As per the revised IFC draft, the RBI should chase the annual retail inflation target to be decided by the government in consultation the central bank every three years. “Inflation target for each financial year will be determined in terms of the Consumer Price Index by the Central Government in consultation with the RBI every three years,” said the draft on which the Finance Ministry has invited comments till August 8.
The draft further said the RBI “must constitute a Monetary Policy Committee to determine by majority vote the Policy Rate required to achieve the inflation target”. The draft talks of ‘RBI Chairperson’ and not ‘RBI Governor’.
Currently, the RBI Governor consults a Technical Advisory Committee, but does not necessarily go by the majority opinion while announcing monetary policy stance. As per the IFC draft, the Committee will be headed by RBI Chairperson. The other members of the panel would be one executive member of the RBI Board, one employee of the RBI and four persons appointed by the Central Government.
“Decisions in a meeting of the Monetary Policy Committee must be taken by a majority vote of the members of the Monetary Policy Committee present and voting,” the draft said, adding the panel must meet every two months.
The IFC was suggested by the Financial Sector Legislative Reforms Commission (FSLRC), set up in 2011, for re-writing the financial sector laws to bring them in harmony with the current requirements. The Commission in March 2013 submitted its report in two volumes, which included the draft law.
The Finance Ministry while revising the draft has also suggested modifications with regards regulatory accountability of financial agencies, capital controls and regulation of systematically important payment system, among others.