 "Under fire, govt takes conciliatory stance")
Just weeks after the release of the revised draft Indian Financial Code (IFC) for public feedback, Finance Secretary Rajiv Mehrishi, on the government's behalf, struck a conciliatory note towards the central bank and said the Centre had no intention of curbing the Reserve Bank of India (RBI) governor's powers on deciding interest rates.
At a hurriedly organised press briefing, Mehrishi said the media was misrepresenting what was essentially a "non-issue" and even said the revised draft did not necessarily represent the government's view. The revised draft IFC, which he termed as "IFC 1.1" was still the equivalent of a discussion paper for the government.
"Quite obviously if the government had made up its mind then there had been no need to seek comments from the public. The fact that we have sought comments indicates that the matter is under discussion. And this is a discussion paper of the government. From here to jump to the conclusion that the RBI's powers have been curtailed would be incorrect," Mehrishi told reporters in the finance ministry on Monday.
The revised draft of the IFC, which proposes that any decision on monetary policy should be taken by majority by a seven-member committee without any veto power to the RBI chief, has created a controversy and is seen as an attempt to curtail the central bank's autonomy.
Mehrishi, however added the government had reached an agreement with RBI on the composition of the monetary policy committee (MPC), though he declined to give further details.
"The MPC (suggestion) is only about two-three per cent of the entire suggestion in IFC. Since we have signed Monetary Policy Framework Agreement with RBI and since the MPC has therefore taken some urgency, we are in discussion with RBI governor, with RBI, in the form and the manner of the MPC.
"We now have a position which is actually agreed, which I will not discuss. It will ultimately be disclosed in Parliament," he said, adding that the MPC would be put in place as early as possible.
While the first version of the IFC, as recommended by the Financial Sector Legislative Reforms Commission (FSLRC) over two years ago in March 2013, had suggested the MPC to decide on policy rates, it had recommended a veto power for the RBI governor. The revised version, instead, offers a deciding vote for the governor in case of a tie.
Also, while the first draft of the IFC suggested that a seven-member MPC should have three members appointed by the government, the revised IFC says four members of seven should be appointed by the government.
It also adds that the government should nominate one representative who is not a MPC member, and hence has no voting rights, but can attend the meetings and state the government's viewpoints.
The revised draft was released by the finance ministry on July 23 for public comments till August 8.
At the media briefing, Mehrishi clarified that IFC 1.1 it was not a proposal of the FSLRC. He went on to add that the changes in the suggestions to MPC were not even a government move, but were based on feedback from stakeholders, as well as studying the best practices from a number of central banks from around the world.
Finance Minister Arun Jaitley and Chief Economic Advisor Arvind Subramanian had earlier said the revised IFC draft was based on the FSLRC report, a position which was contradicted by FSLRC member M Govinda Rao.
"Everything is in public domain including constitution of the committee headed by Justice Srikrishna. So, it is not pertinent to ask whose recommendation it is because that is also in public domain. If you look at the website (of the finance ministry), it clearly says that certain changes have been made. It does not say that it is by the FSLRC... The people of India own this draft that is why it is in public domain," Mehrishi said.
He said a final view on a MPC would be taken based on the feedback as well as international best practices and thus in consultation with all stakeholders. Sources later told Business Standard that the revised IFC was drafted by a team within the Finance Ministry under the guidance of retired justice B N Srikrishna. Srikrishna headed the FSLRC, but the officials confirmed that the draft report was revised after the FSLRC was disbanded.
"The RBI governor does not fix monetary policy in most countries," Mehrishi said, adding that a majority of 18 out of 26 inflation-targeting countries globally decide monetary policy by majority vote rather than arriving at a consensus decision, where the governor as chairperson may have a casting vote.
FSLRC, which was set up in 2011 to review and rewrite the laws of the Indian financial sector, had submitted its report to the then finance minister, P Chidambaram, in March 2013.
Asked if the setting up of the MPC is dependent on introduction of the IFC, Mehrishi replied in the negative and said the committee has gained urgency in light of the monetary policy framework agreement signed by RBI and the government.
In March 2015, the government and RBI had entered into an agreement, committing to use monetary tools to cut inflation rate to pre-decided levels. The Monetary Policy Framework Agreement binds RBI to use monetary policy tools, including fixation of interest rates, to bring down inflation to less than 6 per cent by January 2016 and to around 4 per cent (+/- 2 per cent) by March next year.
WHO SAID WHAT
"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"
Arun Jaitley,
Finance Minister
"I think that mandating the RBI governor to limit consumer price index-based inflation in a certain zone and not giving the RBI a majority in the committee are inconsistent"
C Rangarajan,
former RBI Governor
"FSLRC report is a report of FSLRC. It is not the report of the government or the Finance Ministry. The report is not the view of the government"
Arvind Subramanian,
Chief Economic Advisor
"The government, including (the) Prime Minister, believes that RBI is an independent institution, capable of taking decisions on monetary issues"
Jayant Sinha,
Minister of State for Finance
"The mainstream thinking is that the (RBI) governor should have the benefit of advice through a committee irrespective of who appoints the members. In most countries, the committees have fixed tenures and work across the political cycles unlike in India where the RBI governor can be removed at any time without even giving a reason"
Y V Reddy,
Former RBI Governor
"There is a misconception that the revised draft of the IFC (Indian Financial Code) is a report of FSLRC. But, that is not true. The term of the FSLRC ended in 2013... RBI governor should indeed have a veto power on the monetary policy"
Govinda Rao,
Member of the FSLRC
At a hurriedly organised press briefing, Mehrishi said the media was misrepresenting what was essentially a "non-issue" and even said the revised draft did not necessarily represent the government's view. The revised draft IFC, which he termed as "IFC 1.1" was still the equivalent of a discussion paper for the government.
"Quite obviously if the government had made up its mind then there had been no need to seek comments from the public. The fact that we have sought comments indicates that the matter is under discussion. And this is a discussion paper of the government. From here to jump to the conclusion that the RBI's powers have been curtailed would be incorrect," Mehrishi told reporters in the finance ministry on Monday.
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"The government's final views will be revealed in the final IFC Bill which comes up before Parliament," Mehrishi added, although he declined to give a timeline on when that might be.
The revised draft of the IFC, which proposes that any decision on monetary policy should be taken by majority by a seven-member committee without any veto power to the RBI chief, has created a controversy and is seen as an attempt to curtail the central bank's autonomy.
Mehrishi, however added the government had reached an agreement with RBI on the composition of the monetary policy committee (MPC), though he declined to give further details.
"The MPC (suggestion) is only about two-three per cent of the entire suggestion in IFC. Since we have signed Monetary Policy Framework Agreement with RBI and since the MPC has therefore taken some urgency, we are in discussion with RBI governor, with RBI, in the form and the manner of the MPC.
"We now have a position which is actually agreed, which I will not discuss. It will ultimately be disclosed in Parliament," he said, adding that the MPC would be put in place as early as possible.
While the first version of the IFC, as recommended by the Financial Sector Legislative Reforms Commission (FSLRC) over two years ago in March 2013, had suggested the MPC to decide on policy rates, it had recommended a veto power for the RBI governor. The revised version, instead, offers a deciding vote for the governor in case of a tie.
Also, while the first draft of the IFC suggested that a seven-member MPC should have three members appointed by the government, the revised IFC says four members of seven should be appointed by the government.
It also adds that the government should nominate one representative who is not a MPC member, and hence has no voting rights, but can attend the meetings and state the government's viewpoints.
The revised draft was released by the finance ministry on July 23 for public comments till August 8.
At the media briefing, Mehrishi clarified that IFC 1.1 it was not a proposal of the FSLRC. He went on to add that the changes in the suggestions to MPC were not even a government move, but were based on feedback from stakeholders, as well as studying the best practices from a number of central banks from around the world.
Finance Minister Arun Jaitley and Chief Economic Advisor Arvind Subramanian had earlier said the revised IFC draft was based on the FSLRC report, a position which was contradicted by FSLRC member M Govinda Rao.
"Everything is in public domain including constitution of the committee headed by Justice Srikrishna. So, it is not pertinent to ask whose recommendation it is because that is also in public domain. If you look at the website (of the finance ministry), it clearly says that certain changes have been made. It does not say that it is by the FSLRC... The people of India own this draft that is why it is in public domain," Mehrishi said.
He said a final view on a MPC would be taken based on the feedback as well as international best practices and thus in consultation with all stakeholders. Sources later told Business Standard that the revised IFC was drafted by a team within the Finance Ministry under the guidance of retired justice B N Srikrishna. Srikrishna headed the FSLRC, but the officials confirmed that the draft report was revised after the FSLRC was disbanded.
"The RBI governor does not fix monetary policy in most countries," Mehrishi said, adding that a majority of 18 out of 26 inflation-targeting countries globally decide monetary policy by majority vote rather than arriving at a consensus decision, where the governor as chairperson may have a casting vote.
FSLRC, which was set up in 2011 to review and rewrite the laws of the Indian financial sector, had submitted its report to the then finance minister, P Chidambaram, in March 2013.
Asked if the setting up of the MPC is dependent on introduction of the IFC, Mehrishi replied in the negative and said the committee has gained urgency in light of the monetary policy framework agreement signed by RBI and the government.
In March 2015, the government and RBI had entered into an agreement, committing to use monetary tools to cut inflation rate to pre-decided levels. The Monetary Policy Framework Agreement binds RBI to use monetary policy tools, including fixation of interest rates, to bring down inflation to less than 6 per cent by January 2016 and to around 4 per cent (+/- 2 per cent) by March next year.
WHO SAID WHAT
"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"
Arun Jaitley,
Finance Minister
"I think that mandating the RBI governor to limit consumer price index-based inflation in a certain zone and not giving the RBI a majority in the committee are inconsistent"
C Rangarajan,
former RBI Governor
"FSLRC report is a report of FSLRC. It is not the report of the government or the Finance Ministry. The report is not the view of the government"
Arvind Subramanian,
Chief Economic Advisor
"The government, including (the) Prime Minister, believes that RBI is an independent institution, capable of taking decisions on monetary issues"
Jayant Sinha,
Minister of State for Finance
"The mainstream thinking is that the (RBI) governor should have the benefit of advice through a committee irrespective of who appoints the members. In most countries, the committees have fixed tenures and work across the political cycles unlike in India where the RBI governor can be removed at any time without even giving a reason"
Y V Reddy,
Former RBI Governor
"There is a misconception that the revised draft of the IFC (Indian Financial Code) is a report of FSLRC. But, that is not true. The term of the FSLRC ended in 2013... RBI governor should indeed have a veto power on the monetary policy"
Govinda Rao,
Member of the FSLRC