Reserve Bank of India may say no to Indian Financial Code draft on interest rate panel

MUMBAI: The Reserve Bank of India is likely to tell the central government that the structure of the Monetary Policy Committee (MPC) proposed by the latest version of Indian Financial Code may not be the right one, said a person familiar with its thinking.

The central bank, which is in agreement with the government on inflation targeting and setting up of a policy committee to set benchmark rates, will aim to persuade the government that the governor should be the final authority on monetary policy, said the person who did not want to be identified. The recommendations of the Urjit Patel Committee will form the basis of the central bank’s views.

The Patel panel report has already become the cornerstone of monetary policy making with Consumer Price Index based inflation targets being pursued.

“Monetary policy is a technical issue which needs expertise,” said the person. “The kind of candidates the MPC has will determine the decisions.”

The latest draft of the IFC — which proposes a seven-member Monetary Policy Committee with four of the members being government appointee — has led to a heated debate about the independence of the RBI. The IFC, in its latest avatar, does not provide for a veto for the governor which the previous version had. The Urjit Patel panel, on the other hand, said the MPC should consist of five members, two of whom should be outside of the RBI and to be chosen by the central bank.

After agreeing to target inflation, the government and the RBI have been trying to agree on the structure of the MPC. While the RBI is pushing for the structure to be based on the Patel panel report, some in the finance ministry appear to be keen on a model based on the recommendations of The Financial Sector Legislative Reforms Commission (FSLRC), headed by former Supreme Court judge BN Srikrishna.

Although the new code appeared on the website of the finance ministry, the North Block was subsequently quick to distance itself from the controversial proposals which are seen to be diluting the central bank’s independence and autonomy.

“The draft IFC is a proposal put forth by FSLRC that has been submitted to the government,’’ said Jayant Sinha, Minister of State for Finance. “We are considering it. It is only an input into the government's deliberations.”