 "Monetary policy and its formulation may undergo a sea change")
Much to the chagrin of the Reserve Bank of India and its authorities, the central government has started the process to rework the monetary policy formulation in line with the Indian Financial Code as suggested by the Financial Sector Legislative Reforms Commission. The objective is to come up with modern monetary policy framework with clearly set targets, accountability in decision making and actions open to judicial review.
While it has been a budget announcement to revisit the financial laws as per the Indian Financial Code, but the finance ministry has started its review with the monetary policy which was kept in abeyance. According to official sources, financial legislature as a whole was kept on hold as it would require legislative changes but review of the monetary policy with inbuilt measures of accountability could be started without much legal changes to start with.
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The review has become necessary, according to sources, as monetary policy and the financial objectives of the government has to cohabit. Currently the monetary policy has standalone objective of price stability and interest rate management which is sometimes done at the expense of growth in the economy, they said .
According to official sources close to the development, this policy framework will be designed as per the preamble of the bill of the Indian Financial Code. IFC is the code suggested by the FSLRC and is proposed to be enacted to make the legal premise of the regulatory architecture more transparent, easier to draw synergy in operations and inculcate more accountability of action.
The RBI governor some time back has expressed his reservations on the legal structure suggested by the FSLRC, especially those suggested for putting checks and balances on regulatory activities through judicial oversight.
Officials said that monetary policy should not be framed as a standalone mandate; rather it should coordinate and collaborate with the broad objectives of the government. The RBI keeps a strict vigil on inflation and interest rates which is important from the angle of price stability. They added, sometimes it clashes with the growth objective of the government. High interest rates have been a deterrent to the growth objective of the government.
In this backdrop, the proposed structure as envisaged as per the Indian financial Code for monetary policy is to allocate quantitative monitorable goal to RBI by central government. To guide and monitor the monetary policy five steps have been suggested in the commission’s report.
These recommendations which has shaped the Indian financial code, are now guiding the reworking of the monetary policy framework to make it more responsive to current realities and objectives of the government.
As per the recommended guidelines, firstly, the central bank would establish an internal organisation structure to perform the economic measurement and economic research foundations that must guide monetary policy.
Secondly, an executive MPC will be formed which could actively participate in the decision making process, that would meet on a fixed schedule and vote to determine the course of monetary policy. Once the MPC has determined the policy action, the central bank would establish an operating procedure through which the operating target would be achieved.
Finally, there is accountability mechanisms through which the central bank would be held accountable for delivering on the objectives that have been established for it.