Plot to snatch RBI Guv’s interest rate powers

In a clearly conspiratorial move to destroy the Reserve Bank of India’s (RBI) fiercely independent Governor Raghuram Govind Rajan’s powers to pilot the course of interest rates in the Indian banking system, the Union Government on Thursday proposed to take away his authority to veto the interest rate decision of the central bank’s monetary policy committee.

The revised draft of the Indian Financial Code (IFC), released on Thursday by the Finance Ministry, has also proposed that the all-powerful committee would have four representatives of the Government and only three from the central bank, including the ‘RBI Chairperson’, a move that would effectively transfer the RBI’s present interest rate-determining powers to the Finance Ministry.

Rajan has consistently pursued a fiercely independent policy stance, resisting tremendous pressure from powerful corporate vested interests and their minions in the Government and media to reduce interest rates. 

Interestingly, the Finance Ministry’s Indian Financial Code draft talks of ‘RBI Chairperson’ and not ‘RBI Governor’. At present, the RBI is headed by a Governor.

The IFC, which is conceived as an overarching legislation for the financial sector, proposes a monetary policy committee which will be entrusted with the task of deciding the key policy rate and chasing the annual retail inflation target to be decided by the Government in consultation with RBI.

“The inflation target for each financial year will be determined in terms of the Consumer Price Index (CPI) by the Central Government in consultation with the Reserve Bank every three years,” said the draft on which the Finance Ministry has invited comments till August 8.

Further, it said that the RBI “must form a Monetary Policy Committee to decide by majority vote on the Policy Rate needed to achieve the inflation target”. At present, the RBI Governor consults a Technical Advisory Committee but does not necessarily go by the majority opinion. The first draft, submitted in March 2013, too, had talked about the panel and majority vote — but gave powers to the RBI chairperson to supersede the decision of the panel.  

“In exceptional and unusual circumstances, if the RBI Chairperson disagrees with a decision taken at a meeting of the Monetary Policy Committee, the RBI Chairperson will have the right to supersede such decision,” it had said.  This key provision was dropped in the revised draft. As per the revised draft, there will be three members from the RBI side and four from the Central Government, thus giving full control to the Government on interest rate policy.