American research firm Moody's Analytics, in a report on Thursday, warned against the NDA government's moves to tamper with the autonomy of the Reserve Bank of India in deciding on interest rates, as being potentially damaging for the economy.
"We believe that a government-elected panel undermines the RBI's independence. Moving to the new model would severely dent the RBI's competency: Credibility would be lower, politics would drive decisions, and transparency would be reduced," the economic research conmpany said.
The government last week released the draft Indian Financial Code, which proposes to remove the RBI governor's veto right in the monetary policy committee.
Besides taking away the RBI governor's authority to veto interest rate decisions, the draft also proposed that the monetary policy committee would have four representatives of the government and only three from the central bank, including the RBI "chairperson".
"Overall, we believe that tampering with the central bank's independence would make it difficult to anchor inflation expectations. This would weigh on India's economic prospects, particularly financial market stability," said the Moody's report.
"But given the criticism of the draft bill, it is unlikely to pass parliament," it added.
Terming the measure as a "dangerous road ahead", it said India's monetary policy, with Governor Raghuram Rajan at the helm, has been effective.
In the original draft, the RBI "chairperson" had power to "supersede the decision" of the committee in "exceptional and unusual circumstances".
Finance Minister Arun Jaitley, in his February budget, had announced a monetary policy committee pact earlier with the RBI that will reduce the governor's power to act alone. The monetary policy committee and an official inflation target for the RBI are going to come about through the biggest post-Independence overhaul of the RBI Act, 1934.
However in May, in a big backtrack by the government, Jaitley withdrew from the Finance Bill the clauses pertaining to setting up of a public debt management agency (PDMA) and the amendments to the RBI Act that would have taken away its powers to regulate government securities.
The United Forum of Reserve Bank Officers Employees had earlier written to MPs and chief ministers of various states that the changes, if implemented, would cripple the functions of the central bank. It said the proposed changes would curtail the authority of the RBI and render it totally ineffective in discharging its responsibilities on monetary policy, financial stability and targeting inflation.
In fact, Jaitley on Monday said the government will decide on the draft Indian Financial Code only after comments from stakeholders.
"Financial Sector Legislative Reforms Commission has made its recommendations, which have been made public for comments. Only after the comments are received that the government will take a view," he said.
Moreover, Minister of State for Finance Jayant Sinha also told reporters here on Monday that the government will consult the RBI before taking a decision on the formation of the monetary policy committee, saying the proposal doesn't reflect the government's viewpoint.
