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Suggesting major reform in financial sector, the government today issued revised draft of the Indian Financial Code (IFC) which proposes a monetary policy committee headed by RBI 'chairperson' to decide on key interest rates by majority vote.
As per the revised IFC draft, the RBI should chase the annual retail inflation target to be decided by the government in consultation with the central bank every three years.
"Inflation target for each financial year will be determined in terms of the Consumer Price Index by the Central Government in consultation with the RBI every three years," said the draft on which the Finance Ministry has invited comments till August 8.
The draft further said the RBI "must constitute a Monetary Policy Committee to determine by majority vote the Policy Rate required to achieve the inflation target".
The draft talks of 'RBI Chairperson' and not 'RBI Governor'.
Currently, the RBI Governor consults a Technical Advisory Committee, but does not necessarily go by the majority opinion while announcing monetary policy stance.
| FSLRC's First IFC Draft, March, 2013 | Urjit Patel Committee Report, January 2014 | Revised Draft, July, 2015 | |
| Strength of MPC | Seven members, including chairman | Five members, including chairman | Seven members, including chairman |
| Chairman | RBI Governor | RBI Governor | RBI Governor |
| Appointments of members | One Executive Member of RBI Board nominated by Board, two members | ||
| by Govt in consultation with RBI Governor, three members by government | Deputy governor, in charge of monetary policy, to be vice-chairman, executive director in charge of monetary policy to be member, two other members to be appointed by chairman and vice-chairman on the basis of expertise and experience | One Executive Member of RBI Board nominated by Board, one RBI employee nominated by RBI governor, four members by government | |
| Decision by the committee | RBI governor to have a veto power | Majority voting, with each member has to caste a vote | Majority decision, only in case of tie, RBI To have a second and casting vote |
| Source: Report of the Expert Committee to Revise and Strengthen the Monetary Policy Framework, headed by RBI deputy governor Urjit Patel | |||
| Draft IFC codes as given on the finance ministry site | |||
As per the IFC draft, the Committee will be headed by RBI Chairperson. The other members of the panel would be one executive member of the RBI Board, one employee of the RBI and four persons appointed by the Central Government.
"Decisions in a meeting of the Monetary Policy Committee must be taken by a majority vote of the members of the Monetary Policy Committee present and voting," the draft said, adding the panel must meet every two months.
The IFC was suggested by the Financial Sector Legislative Reforms Commission (FSLRC), set up in 2011, for re-writing the financial sector laws to bring them in harmony with the current requirements. The Commission in March 2013 submitted its report in two volumes, which included the draft law.
The Finance Ministry while revising the draft has also suggested modifications with regards regulatory accountability of financial agencies, capital controls and regulation of systematically important payment system, among others.
