RBI’s power to get diluted
RBI’s power to get diluted Since its establishment in 1935, the Reserve Bank of India or RBI has played a crucial role in protecting the Indian economy from the downturn and helping it to sail smoothly through the various crisis. It has always reiterated its economic independence and voiced its opinions fearlessly. There are very few who doubt its credibility. Just as judiciary needs to be kept away from the influence of the Government, the Central Bank also needs to be freed from executive interference so that it can continue to act as a voice of caution and reason. Independence is raison d’être of RBI.
In March 2011, the UPA Government constituted the Financial Sector Legislative Reforms Commission (FSLRC) following the reason that a need was felt to club all existing financial laws and regulations and remove regulatory gaps and promote coherence and efficacy. In March 2013, when the Commission came up with its first report, it drew a lot of criticism from the central bank. HIGHLIGHTS OF COMPANIES
The present government came up with a fresh draft of the Indian Financial Code in August 2015, which was put up in public domain for comments. There were major changes that had been made in the code which, if get implemented later, would have a huge impact on the functioning of the financial sector. The revised Indian Financial Code aims at vesting various boards with the general direction and management of the financial agencies. For instance, the Financial Authority Board and the Reserve Bank Board will be vested with the supervisory power over the Financial Authority and Reserve Bank, respectively. It also provides for the following:
• Creation of a Central Financial Redressal Agency for addressing the grievances of Financial Consumers.
• Prudential regulations of financial firms in order to protect the interest of financial consumers.
• Establishment of a unified resolution corporation to take care of the winding up of firms suffering from financial failures. RBI’s power to get diluted
• Single agency for the management of government debt.
• Establishment of the Financial Stability and Development Council (FSDC) at the central level to look after the matters relating to systematic risk.
• Establishment of a Monetary Policy Committee for deciding policy rates.
The revised draft is also facing censure for a number of reasons. The most controversial aspect of the draft perhaps is the establishment of the Monetary Policy Committee. Presently, RBI and its Governor enjoy absolute power to set the rates. Though they are guided by a Technical Advisory Committee (TAC), but the ultimate decision-making power rests with the Governor. However, with the enactment of the IFC, this power will shift into the hands of a 7-member committee comprising of three members appointed by the RBI and four members appointed by the Central Government. The earlier code gave veto power to the RBI Governor to supersede the decision of the committee in unusual and special circumstances. However, no such provision is incorporated in the present draft. Being in the minority in the MPC, RBI would lose its autonomy and thereby, resulting in a conflict of interest with the external members. Providing executive with the power to control the monetary policy is a menace to the economy. The Government mostly pitches for lower rates for boosting economic growth, but RBI’ approach is deemed rationale which would always opt for a feasible policy.
Having MPC is not a bad idea per se. However, more power should rest with the central bank than the Government. According to a former RBI Governor, “There is no problem with the setting up of an MPC. But the ultimate responsibility for setting the interest rates must reside with the RBI Governor because who else can take hard decisions in difficult times.”
In November 2015, the Hindu reported that the Reserve Bank of India and the Finance Ministry had finally agreed to set up a Monetary Policy Committee. However, the proposed committee would have five members instead of seven (recommended earlier by FSLRC) with two government nominees and three RBI nominees. Each member would have one vote and in case of a tie, the RBI Governor, also the chair of the committee, will have a casting vote. The inflation target for the RBI in each financial year will be determined by the Government in consultation with the RBI itself. This is a welcome move as it would not only make the latter more accountable as well as transparent in its functioning but would also ensure its autonomy. Recently, the RBI Governor Raghuram Rajan said that the negotiations over the MPC have been completed and soon, the government will table it before Parliament through an amendment. It is hoped that the Government would fulfil its promise and would not downgrade it or in any way, curtail the powers of the central bank.