Govt on back foot over draft Bill to curb RBI's autonomy

The Finance Ministry on Monday went into damage control mode over the controversy sparked by the draft Bill proposing to curb the autonomy of the RBI in fixing key interest rates which forms part its management of the country's monetary policy. At a hurriedly called press conference, Finance Secretary Rajiv Mehrishi went into a detailed explanation as to whose draft proposal it was to withdraw the RBI Governor's veto power on fixing the benchmark interest rate by the monetary policy committee that is proposed to be set up.

In the process he contradicted Chief Economic Advisor (CEA) Arvind Subrmanium to say it was not a proposal of the Financial Sector Reforms Commission (FSLRC) but in the same breath he said that it was not a government move either. He said that the government has not made up its mind on the draft IFC and is still seeking comments on it which indicates that it is still under discussion. This is still to be considered by the government as a discussion paper, he added.

"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 said. "The Government's final mind will be revealed on the draft Bill which comes out before Parliament. This clarifies that there is no decision in government as of now," Mehrishi said.

Chief Economic Advisor Arvind Subramanian, on the other hand, had earlier said that the revised IFC draft was based on the FSLRC report. However, FSLRC member M Govinda Rao had contradicted this view. Rao has stated that FSLRC did not make any recommendation to do away with the veto power of the RBI Governor on fixing interest rates.

Terming the new draft bill as IFC 1.1, Mehrishi said the revised bill which has been put up on the website of Finance Ministry does not say it is a Financial Sector Legislative Reforms Commission (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. The revised draft of the IFC, which proposes that any decision on monetary policy should be taken by a majority of the seven-member committee without any veto power to the RBI Governor, has triggered an uproar as it was seen as an attempt to curtail the central bank's autonomy.

According to the revised draft, the monetary policy committee is to consist of seven members - three from RBI and four nominated by the government - with the Reserve Bank of India's governor holding the deciding vote in case of a tie. 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. While the first version of IFC, as recommended by the FSLRC over two years ago in March 2013, had also suggested a Monetary Policy Committee (MPC) to decide on policy rates, it had recommended a veto power for the RBI governor.

The revised draft, released by the Finance Ministry last month on July 23 for public comments till August 8, suggested doing away with this veto power and wants the seven-member MPC to take decisions by a majority vote. RBI Governor Raghuram Rajan had met Prime Minister Narendra Modi recently and one of the issues discussed at the meeting included the revised code.