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Revised Financial Code Draft Eroding The Autonomy Of RBI

The Rao’s clarification contradicts the finance ministry’s earlier defence that they have not attempted to take over the autonomy of the central bank in setting monetary policy.

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Revised Financial Code Draft Eroding The Autonomy Of RBI

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  1. Revised Financial Code Draft Eroding The Autonomy Of RBI E_mail - kislay@me.com Tell-91 11 3044 64 89 | Fax-91 11 3044 65 00

  2. Corporate Lawyer • Last week, the Union finance ministry issued a fresh draft of the Indian Financial Code (IFC), which became the subject of controversy due to its provisions on fiscal policy. It received the greatest ire of critics as it projected government dominated monetary policy committee (MPC), which will take away the power of the “Governor” of the Reserve Bank of India in determining the policy rates. Moreover, as per the recently created draft, the RBI chairperson will only get a second and casting vote if the Monetary Policy Committee members are unable to arrive at a decision. And four out of seven members of the MPC will be appointed by the union government. Thus, the new draft bill of IFC on limiting the powers of the central bank governor is severely criticized.

  3. Corporate Lawyer • Some of the loudest critics of the draft believe that such monetary policy changes will undermine the autonomy of the central bank. A new model will dilute RBI’s power. Interfering with RBI’s independence would reduce the transparency and lower the trustworthiness which would ultimately affect the growth prospects of the Indian economy, especially financial market stability. While, there are some experts who see it as a big shift from the present system, which gives too much authority to the governor of central bank, to a more viable system.

  4. Corporate Lawyer • The RBI and the government have been combating for a long time on how policy interest rates should respond to inflation. During the governance of UPA, the finance ministry frequently nudged the central bank to reduce interest rates. UPA govt. was in belief that it will help improving the economic growth, but the RBI denied obliging, creating unprecedented tension. Now, after so many controversies on the revised draft by Financial Sector Legislative Reforms Commission (FSLRC), the finance ministry is distancing itself from it saying it does not reflect views of the government. • Finance Minister ArunJaitley said to reporters inside the Parliament campus, “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.”

  5. Corporate Lawyer • While, one of the members of FSLRC, M GovindaRao explained that the revised draft of IFC is not the report of the commission. He further stated that the governor of the central bank should have full say in determining the interest rates. • The Rao’s clarification contradicts the finance ministry’s earlier defence that they have not attempted to take over the autonomy of the central bank in setting monetary policy. It conclusively confirms that there is certainly an attempt for the government to seize control of monetary policy of the central bank. • The Corporate Lawyer KislayPandey said, “Despite of diluting the powers of RBI, the Government can conduct the monetary policy function taking parliament into confidence andset the inflation target or growth/employment target on central bank and the RBI will be held responsible to attain these objectives.”

  6. Corporate Lawyer • As per the envisaged budget, the powers of RBI can be diluted in the future when one of the vital functions of RBI-debt management- will be moved to a completely different debt management agency. However, it is clear that governor of RBI will have the absolute power in the new monetary policy agenda. And, it will be significant to see how much this power works in the favour of central bank, given that the Government is the head of the RBI.

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