The draft proposals of the Indian Financial Code (IFC), which snatch away the veto power of the RBI governor over interest rates and pack the Monetary Policy Committee with government nominees, has provoked a barrage of criticism, not the least from RBI governor Raghuram Rajan, who has termed the proposed regulatory functions as “schizophrenic” and as reducing the RBI to a “paper tiger”. Even the stock market on Friday gave the Financial Sector Legislative Reforms Commission’s (FSLRC) brainchild, namely the IFC, a thumbs down with the Sensex registering a fall of 259 points. The IFC proposals, basically aimed at strengthening the regulatory accountability of financial agencies, are based on the recommendations of the FSLRC headed by former Supreme Court judge B.N. Srikrishna. There is a view that FSLRC and the government have assiduously been trying to chip away at the RBI’s powers in the name of streamlining the regulatory processes.
The latest proposals are seen not only as an attempt to clip the wings of the RBI governor but as an assault on the RBI as an institution. During the Asian crisis, when all the “Asian Tigers” went under, India was the only country that survived with its currency intact thanks to the RBI and the support of the then government. It managed with foresight the exchange rate in a manner that allowed no currency depreciation shocks. More recently Dr Rajan cushioned India against the ravages faced by other currencies when the US Fed suggested it may raise interest rates.
There is no doubt that the RBI governor has to take the ultimate responsibility for inflation, in consultation with experts and even the government. But his is the final decision. It is not a question of “no veto” powers, it is an issue of the momentum and credibility of India’s monetary policy institution. The RBI has the responsibility to delivering its mandate of keeping inflation under control and monetary policy is its only tool. So this should not be seen as a political issue. But it does seem the government is trying to take over monetary responsibility also, besides fiscal.
The constitution of the Monetary Policy Committee is weighed in favour of the government. One will have to see who the government nominees are. If it is packed with omnipotent and omniscient secretaries and joint secretaries to the government, then it spells disaster. Of course several voices in the government, including the chief economic adviser, Arvind Subramanian, have come out to say that the IFC proposals do not have the government’s stamp. The proposals are in the public domain for feedback so the story does not end here. Let us see if better sense prevails.
