After four months of debate and discussion, the Reserve Bank of India and the Finance Ministry have overcome the stalemate on the proposed amendments to the Reserve Bank of India Act to reset the responsibility of deciding India’s monetary policy.
The Ministry’s note for the Cabinet’s approval proposes a five-member Monetary Policy Committee.
The government will nominate two members and the RBI three members.
Each of the five members would have one vote and the RBI Governor, chair of the committee, will have a casting vote in the event of a tie in situations such as the absence of a member, a top official of the Finance Ministry told The Hindu.
The source, however, refused to say whether the Governor would also have the right to overrule the committee’s decisions.
The inflation target for the RBI in each financial year will be determined by the Government in consultation with the RBI itself.
At present, the Governor is advised by a technical committee but can veto decisions, being singularly responsible for monetary policy. A draft of the Indian Financial Code that the Ministry had posted on its website in July proposed to strip the Governor of veto vote on the monetary policy. The draft proposed a six-member monetary policy committee, besides powers for the government to appoint four of the six members.
The proposal drew sharp criticism, including from the former RBI Governors. Though the Ministry did not take it off its website, a number of its senior officials gave public statements disowning the draft. Relations between the Centre and the RBI had already been uneasy over amendments to the RBI Act that Finance Minister Arun Jaitley had announced in his Budget speech, leading to a breakdown of talks between the two sides. Realising the RBI’s opposition, the Finance Minister dropped the proposed amendments from the Finance Bill.
The Ministry worked out a ‘diluted’ proposal but RBI Deputy Governor H.R. Khan, in a letter, rejected even that. Differences ran so deep that the Ministry broke the convention by nominating a deputy of the former Finance Secretary, Rajiv Mehrishi, to attend the RBI’s board meetings in place of him. And, Mr. Mehrishi and other Ministry officials, on more than one occasion, cancelled at the last minute high-level meetings with the RBI.
“It would not have been easy to be in [RBI Governor Raghuram] Dr. Rajan’s shoes as employee unions of the RBI were staunchly opposed to all of the Ministry’s proposals… he would have had to work to bring them as well as the Ministry on to the same page,” said a Ministry official.
Mr. Rajan held several rounds of discussions to break the impasse.
