New Delhi: As the move to strip RBI Governor of veto power on deciding interest rates faced backlash, the government Monday 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.
The revised draft, posted on the Finance Ministry's website 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.
Under the present system, the Reserve Bank of India Governor is appointed by the government but controls monetary policy and has veto power over the existing advisory committee of RBI members and outside appointees that sets rates.
Terming the new draft bill as IFC 1.1, Mehrishi said the revised bill which has been put up on the website does not say it is a FSLRC recommendation.
"Everything is in public domain including constitution of the committee headed by Justice Srikrishna. So, it is not pertinent to ask whose recommendation it is because that is also in public domain.
"If you look at the website, that clearly says that certain changes have been made. It does not say that it is by the FSLRC... The people of India own this draft that is why it is in public domain," Mehrishi said.
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.
"FSLRC report is a report of FSLRC. It is not the report of the government or the Finance Ministry. The report is not the view of the government," Subramanian had said.
Stressing that RBI Governor should indeed have a "veto power" in the monetary policy, FSLRC member M Govinda Rao had 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".
Mehrishi further said that the government's "final mind" on IFC will be revealed when the draft bill is brought before Parliament for consideration and approval. "This clarifies that there is no decision in government as of now," 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.
Referring to the row over clipping RBI Governor's power, Mehrishi said it has been created by media and "to my mind (it) is essentially a non-issue as of now that somebody is trying to curtail RBI's power of setting monetary policy".
The Indian Financial Code (IFC) has almost 400 sections, he said, adding that the ministry had received suggestions in huge volume and collated and eliminated the duplicacies.
All the suggestions received on the draft IFC were sent to Justice Srikrishna committee and the revised draft can be called IFC 1.1, Mehrishi said.
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.
Asked if the setting up of monetary policy committee (MPC) is dependent on introduction of IFC, Mehrishi replied in the negative and said the committee has gained urgency in light of monetary policy framework agreement signed by RBI and the government.
"The MPC (suggestion) is only about 2-3 percent of the entire suggestion in IFC. Since we have signed Monetary Policy Framework Agreement with RBI and since the MPC has therefore taken some urgency, we are in discussion with RBI governor, with RBI, in the form and the manner of the MPC.
"In fact, we now have a position which is actually agreed, which I will not discuss. It will ultimately be disclosed in Parliament," he said, adding that the MPC would be put in place as early as possible.
In March 2015, the government and the RBI had entered into an agreement, committing to use monetary tools to cut inflation rate to pre-decided levels.
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 percent by January, 2016 and to around 4 percent by March next year.
The objective of monetary policy will be to "primarily maintain price stability while keeping in mind the objective of growth".
While the agreement gives a free hand to the RBI Governor to decide on the monetary policy measures to achieve the inflation target, it also requires the RBI to give out to the central government a report in case the target is missed for a period of time.
As per the agreement, RBI is also required to make public every six months a document explaining the sources of inflation and its forecast for the period between 6-8 months.
