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India Seeks to Weaken Central Bank s Power
24 July 2015
MUMBAI,24/July/2015 (ITNN)>>>> India’s Ministry of Finance released late Thursday a draft regulation aimed at revamping decision-making processes at the country’s central bank, as the two institutions negotiate changes in the way the Reserve Bank of India sets monetary policy. In a draft of the Indian Financial Code circulated for public discussion,the finance ministry proposed the setting up of a seven-member Monetary Policy Committee, a body that would set interest rates. Now, India’s central bank governor is advised by a technical committee,but is the one to make the final decision on rates.

According to the draft, the ministry would appoint four members, while the RBI would choose the remaining three. The proposal strips the RBI governor of his power to set rates alone, but suggests that he casts a second vote in the event of a tie in the MPC. The debate on how India should revamp its monetary policy framework has been ongoing for months,as the government has set the stage for the overhaul of the way the RBI sets rates.

The negotiations reached a stalemate, government officials familiar with the situation told The Wall Street Journal in May, because both institutions want to control the majority of the appointments to the committee. At stake is the RBI’s independence, which isn’t enshrined in its 1930s founding charter. The Mumbai-based RBI has routinely come under political pressure from New Delhi to cut rates to spur growth.
“The draft IFC suggests that government-appointed members will be in the majority, a significant dilution of the RBI’s powers,” Nomura economist Sonal Varma said in a note.

Finance Minister Arun Jaitley has pledged to pass legislation to overhaul the central bank’s governance by the end of the fiscal year in March 2016. Until recently, ongoing negotiations focused on a five-member rate-setting committee. The RBI favored an option whereby three members—or a majority of the committee—would be appointed by the central bank,while the governor would chair a separate committee to appoint the remaining two. This setup was close to one outlined by Urjit Patel,an RBI deputy governor,in a report earlier this year on how to revamp the bank’s structure.

The government official described the RBI proposal as “unacceptable,” and said that the finance ministry would agree to a five-member board, but not with a majority of the members appointed by the central bank. The deadline for comments on the draft Indian Financial Code, published on the Ministry of Finance’s website on Thursday is Aug. 8.