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Rediff.com  » Business » Curtailing RBI Guv's veto powers is another flash point

Curtailing RBI Guv's veto powers is another flash point

By Manojit Saha
July 25, 2015 08:46 IST
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Urjit Patel panel wanted all members to be appointed by RBI

The composition of the monetary policy committee (MPC) – as suggested by the revised draft Indian Financial Code – could be another flash point between the country’s central bank and the government as it suggested majority of the members to be appointed by the latter.

This is in contrast with the Urjit Patel committee recommendation – a panel which was set up by Reserve Bank of India – that suggested three out of five members will be from the central bank and all of them will be appointed by the central bank.

The monetary policy committee will be the decision making body on the interest rate stance.

The revised draft IFC, that was released by the government yesterday, suggested a 7 member monetary policy committee, headed by the RBI governor, who will have the casting vote in case of a tie while taking the decision on interest rate movement.

However, the panel suggested only two members (excluding RBI governor) will be from RBI – one will be nominated by RBI board and the other by the governor. The other four members will be appointed by the government.

The Urjit Patel committee had cited examples to show that the government does not have representation in the MPC in most countries, except in Colombia, Guatemala and the Philippines.

The Patel committee had suggested that RBI governor will be the Chairman of the MPC, the deputy governor in charge of monetary policy will be the vice chairman and the executive director in charge of monetary policy will be a member.

“Two other members will be external, to be decided by the Chairman and Vice Chairman on the basis of demonstrated expertise and experience in monetary economics, macroeconomics, central banking, financial markets, public finance and related areas,” the committee said.

If the revised IFC draft becomes a reality, then the central bank could lose significant power to decide interest rates it will be a minority.

The government, on the other hand, had argued that, majority of the members cannot be from the central bank as they would not like to contradict the government, openly in a meeting.

The composition of the MPC could be another area of tension between RBI and the government. There relationship between the two has been uneasy in recent times, particularly, when the finance ministry wanted to separate debt management function from RBI. The move was later postponed by the government following the central bank’s reservation.

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Manojit Saha in Mumbai
Source: source
 

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