Rajiv Mehrishi, who retires this month, says govt has reached an agreement with RBI on composition of Monetary Policy Committee (MPC) and it will be disclosed in Parliament
New Delhi : As the move to strip RBI Governor of veto power on deciding interest rates faces backlash, the government said no decision on curtailing powers of the central bank has yet been taken.
With the FSLRC disowning a revised draft that sought to remove RBI Governor’s veto power and give government the control over a proposed interest-rate setting panel, Finance Secretary Rajiv Mehrishi hurriedly called a press briefing to say that the report was neither of the government nor of FSLRC, but “people of India own this draft report”.
In doing so, he also contradicted Chief Economic Advisor Arvind Subramanian who had said the revised draft of Indian Financial Code (IFC) was a Financial Sector Legislative Reforms Commission (FSLRC) report.
The proposal in the revised draft was also attacked by some economists as well as Moody’s Analytics as a threat to independence of monetary policy.
The government has not made up its mind on draft IFC, Mehrishi said, adding that it is seeking comments on the report, which indicates that it is still under discussion.
“This is still to be considered by the government as a discussion paper. So from that, to jump to a conclusion that some curtailment of the power of the RBI has been made or the government has decided to do so would be incorrect,” he added.
Mehrishi, who retires this month, said the government has reached an agreement with RBI on composition of Monetary Policy Committee (MPC) and it will be disclosed in Parliament.
“We are in discussion with RBI Governor, with RBI, in the form and the manner of the MPC and in fact we now have a position which is actually agreed but which I am not going to discuss. It will ultimately be disclosed in the Parliament,” he said.
Asked if the government has firmed up views on the revised draft suggesting a 4:3 ratio of members in MPC in favour of the Government, he said that “government has not applied its mind on what the final thing would be”.
The first version of IFC, as recommended by the FSLRC over two years ago, in March 2013, had also suggested a MPC to decide on policy rates with a veto power to the central bank chief to overrule majority decision.
Chief Economic Advisor Arvind Subramanian had earlier said that the revised IFC draft was based on FSLRC report, a position which was contradicted by FSLRC member M Govinda Rao.
The revised draft of the Indian Financial Code (IFC), which proposes that any decision on 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.
The finance ministry would consider international best practices while taking a decision, he said.
“The RBI Governor does not fix monetary policy in most countries,” Mehrishi said, adding that a majority of 18 out of 26 inflation targeting countries globally decide monetary policy by majority vote rather than arriving at a consensus decision, where the governor as chairperson may have a casting vote.
“This is to clarify that anybody could have made a recommendation on RBI having a tie breaker vote. It is on the table and up for discussion. There is no harm in discussing any idea,” he said.
The Monetary Policy Framework Agreement binds RBI to use monetary policy tools, including fixation of interest rates, to bring down inflation to less than 6 per cent by January, 2016 and to around 4 per cent by March next year.
Defending the Finance Ministry’s decision to nominate Additional Secretary on the board of RBI, Finance Secretary Rajiv Mehrishi also said the government has the right to decide who will represent it at the board meetings.
