'Government to take final view on Financial Code after consultation'

Source: PTI

The government will consult stakeholders including the Reserve Bank before firming its views on a draft bill that seeks to limit the central bank's authority in setting interest rates. Finance Minister Arun Jaitley said the government will take a view on the revised draft of the Indian Financial Code -- which favours creation of an interest rate-setting panel where a majority (out of its 7 members) is nominated by government -- only after receiving comments from stakeholders. The Chief Economic Adviser Arvind Subramanian has already dubbed the IFC draft as merely a FSLRC report, not reflecting government views. "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," Jaitley told reporters here. Known as the Indian Financial Code, the draft bill, on which comments are due by August 8, is meant to unify various laws that govern the country's financial markets. 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. While the earlier version of the code gave RBI Governor veto power over panel's decision, the revised draft does not confer any such powers on him. Minister of State for Finance Jayant Sinha said the government will take a decision after "considering its (RBI's) views". RBI Governor Raghuram Rajan had met Prime Minister Narendra Modi on Friday and one of the items discussed at the meeting included the revised FSLRC code. Later today, Sinha told ET Now that the issue of veto powers of RBI Governor was "very much an open issue". Sinha said, "various reports (and) inputs come into North Block (where the Finance Ministry is housed)... All of these will be taken into consideration" at the time of firming government views. The FSLRC report is not a government report, he insisted. The central bank had in January last year set up a five-member monetary policy committee (MPC) with no government appointees. The revised draft of IFC, released by the ministry last week, is based on the recommendations of the Financial Sector Legislative Reforms Commission (FSLRC), headed by Justice B N Srikrishna. The previous version of the draft bill called for a 7-member committee including two central bank officials, three government appointees and two members picked jointly by the Finance Ministry and the central bank governor. It also gave the governor a veto over the decision. Conceived as an overarching legislation for the financial sector, IFC 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. Further, it said the RBI "must constitute a Monetary Policy Committee to determine by majority vote on the Policy Rate required to achieve the inflation target". 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.    

July 27, 2015 | 8:29 pm IST.