The updated draft of the Indian Financial Code made headlines, as it proposed to strip the RBI Governor of his powers. If passed, he will no longer have the authority to veto policy rates.
What is the IFC?
The Financial Sector Legislative Reforms Commission was set up in 2011, to re-write the Code to regulate the financial sector and introduce principles for financial regulation and the constitution, objectives, powers and interaction of financial agencies. Its also aimed to bring about coherence and effectivity in the financial regulatory framework. Headed by Justice BN Srikrishna, the committee submitted its report in two volumes, which included 'Analysis and Recommedation' and 'Draft Law'. The revised draft in twenty parts will strive to regulate financial agencies.
According to the Act, the general direction and management of the financial agencies will be vested in the respective boards; the Financial Authority Board for the Financial Authority, the Reserve Bank Board for the Reserve Bank, the Redress Agency Board, with respect to the Redress Agency, the Corporation Board for the Corporation; the Council Board for the Council and the Debt Agency Board, with respect to the Debt Agency.
The Code deals with the establishment of financial agencies, establishment and structure of the tribunal, allocation and regulation of financial services.
What's the fuss?
The revised draft of Indian Financial Code by the Finance Ministry, also proposed that the powerful committee would have four representatives of the government and only three from the central bank, including the 'RBI Chairperson'. The draft which is conceived as a 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 by the Central Government in consultation with the Reserve Bank every three years,” said the draft. It further said the RBI “must constitute a Monetary Policy Committee to determine by majority vote on the Policy Rate required to achieve the inflation target.”
“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.”
In view of the uproar created by the Code, Finance Minister Arun Jaitley said the government will take a view on the draft Indian Financial Code, which proposes to dilute powers of the RBI chief, only after receiving comments from stakeholders.
“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,” he told reporters. The draft talks of 'RBI Chairperson' and not 'RBI Governor'.
