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Indian Financial Code Draft:Government Plans to Reduce RBI’s Power – Full Analysis

On Thursday 23-07-2015 Finance Ministry Arun Jaitley released the revised draft of Indian Financial Code (IFC).The revised draft is based on the recommendations of the Financial Sector Legislative Reforms Council (FSLRC), headed by former Supreme Court judge BN Srikrishna

Indian Financial Code Draft – Important Points

The central bank governor will not have a veto over interest rates and the government will have the power to appoint a majority of the members of the monetary policy committee, according to a revised draft.

Draft will also replace multiple laws governing the financial sector particularly the move to dilute the absolute powers the Reserve Bank governor which includes setting benchmark rates.

The proposed financial code also lays down a framework for inflation-targetting under which the central bank and government will together set the target.

As per the latest version, the government will have the right to appoint four of seven members of the monetary policy committee (MPC).

Draft also proposed that an all-powerful monetary policy committee would have four representatives of the government and only three from the central bank, including the ‘RBI Chairperson’ – thus giving full control to the government on policy rate.

At present, the RBI Governor consults a Technical Advisory Committee, but does not necessarily go by the majority opinion while deciding on the monetary policy stance.