New Delhi: In a move that may dilute powers of RBI chief, the government Thursday proposed taking away his authority to veto the interest rate decision of the central bank's monetary policy committee.
The revised draft of Indian Financial Code (IFC), released today by the Finance Ministry, has also proposed that the all-powerful committee would have four representatives of the government and only three from the central bank, including the 'RBI Chairperson'.
The draft talks of 'RBI Chairperson' and not 'RBI Governor'. RBI is headed by a Governor, at present.
The IFC, which is conceived as an overarching legislation for the financial sector, proposes a monetary policy committee which will be entrusted with the task of deciding the key policy rate and chasing the annual retail inflation target to be decided by the government in consultation with RBI.
"Inflation target for each financial year will be determined in terms of the Consumer Price Index (CPI) by the Central Government in consultation with the Reserve Bank every three years," said the draft on which the Finance Ministry has invited comments till August 8.
Further, it said the RBI "must constitute a Monetary Policy Committee to determine by majority vote on the Policy Rate required to achieve the inflation target".
At present, the RBI Governor consults a Technical Advisory Committee, but does not necessarily go by the majority opinion while deciding on the monetary policy stance.
The first draft, submitted in March 2013, too had talked about the committee and majority vote, but gave powers to RBI chairperson to supersede the decision of the panel.
"In exceptional and unusual circumstances, if the RBI Chairperson disagrees with a decision taken at a meeting of the Monetary Policy Committee, the RBI Chairperson will have the right to supersede such decision," it had said. The provision was dropped in the revised draft.
As per revised draft there will be three members from the RBI side and four from the central government, thus giving full control to the government on policy rate.
The draft also proposes setting up a 'Financial Authority' to regulate all financial services other than banking and payment systems.
The Reserve Bank will regulate banking, systemically important payment systems and authorised dealership, it said.
"The Financial Authority will regulate -- all financial services, except banking, systemically important payment systems and authorised dealership; and all financial products," the draft added.
On capital controls, the new draft said the central government must make rules in consultation with the RBI.
The objective, it said is to facilitate capital account transactions in a manner that encourages investment and economic growth in India.
The aim is also to manage adverse short-term fluctuations in the balance of international payments and regulating capital account transactions that affect 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".
The revised draft, which was released after comments on the original one, also said there should be no restrictions on current account transactions, while government may impose prohibitions on capital account transactions on grounds like, national security, critical infrastructure and technology.
Talking about accountability mechanism for financial agencies, it said every Board must have an audit committee, consisting of at least two non executive members.
The new draft also proposes to remove the provision empowering Financial Sector Appellate Tribunal (FSAT) to review regulations.
Further the modifications, the Finance Ministry said have taken into consideration the enactments the Pension Fund Regulatory and Development Authority Act, 2013 (PFRDA Act) and Securities Laws (Amendment) Act, 2014.
"However, the modifications in the revised Draft IFC remain consistent with the overall structure and philosophy of the FSLRC Report," it added.
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 FSLRC has recommended a non-sectoral, principle based legislative architecture for the financial sector, by restructuring existing regulatory agencies and creating new agencies, wherever needed for better governance and accountability.
While the original draft had 450 clauses, the number has been reduced to 414 in the revised one.
