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BW Businessworld

RBI Or FinMin: Who’s The Master?

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Union Minister of State for Finance’s Jayant Sinha’s stance that the Financial Sector Legislative Reforms Commission (FSLRC) recommendations are only an input; and does not in any way reflect its thinking may have calmed frayed nerves at Mint Road for now, but the issue refuses to go away.
The FSLRC is a body set up by the Centre (North Block) on 24th March 2011, to review and rewrite the legal-institutional architecture of the financial sector to create an Indian Financial Code (IFC).
The current round of tension is due to the fact that in its revised draft submitted on 23rd July, the FSLRC makes reference to the Reserve Bank of India’s governor as “the Reserve Bank Chairperson”. And that “inflation target for each financial year will be determined in terms of the Consumer Price Index by the Central Government in consultation with the Reserve Bank every three years”. To that extent, a Monetary Policy Committee (MPC) is to be set up which will determine “by majority vote the Policy Rate required to achieve the inflation target”. The power of the Centre is higher (in voting strength terms in the said committee) due to the fact while Mint Road will have three members on it (which includes the “Governor” (as we now know of it), one executive member of the RBI Board and an RBI employee, four persons appointed by the Central Government.
As on date, the RBI Governor only “consults” a Technical Advisory Committee, but can veto it. But in the proposed MPC system, there is no such veto power; and the revised draft says “in the event of a tie amongst the members of the MPC, the Reserve Bank Chairperson will have a second and casting vote”. What is not clear at this point in time is if the “second and casting vote” is not as good as a veto though technically not called one.
There is a school of thought that in these complex times, no one institution should have the unbridled power to take decisions which affects the life of a billion people. That the time has come to make the RBI more responsive within a new architecture with checks and balances. While there is merit in such a view, Mint Road’s institutional memory will not let it give up so soon.
Some of the FSLRC suggestions have evoked a sharp response from RBI governor, Raghuram Rajan. At State Bank of India’s Banking and Economic Conclave (17th June 17, 2014), he reacted to the proposal for a Financial Sector Appellate Tribunal: “But how much checking and balancing is enough? Do we want even policy decisions to be appealable? Can legal oversight become excessive?” He was of the view that such an approach can vitiate the flexibility afforded by rewriting laws. “The RBI, despite the general deterioration in the probity of public institutions, has maintained a reputation for integrity,” he had said.