Government should have more say on monetary policy: Ministry panel.

NEW DELHI: A committee including government appointees should set monetary policy, a finance ministry panel recommended on Thursday, in a sign that the government aims to increase its say over policy while lessening the influence of the Reserve Bank of India governor.

The finance ministry published on its website a draft financial sector law including recommendations to set up a monetary policy committee empowered to make binding decisions.

Unlike most major central banks, monetary policy in India is set by the RBI governor alone.

"The framework envisaged by the Commission features a strong combination of independence and accountability for RBI in its conduct of monetary policy," the committee said in a report that accompanied the draft law.

The finance ministry panel was set up in 2011 by then finance minister Pranab Mukherjee to streamline the financial sector laws, rules and regulations for the country's fast growing financial sector.

The report was submitted to Finance Minister P. Chidambaram last Friday but made public only on Thursday. He said he aimed to implement its recommendations quickly.

India's interest rates are among the highest of any major economy, and Governor Duvvuri Subbarao's hawkish stance has frustrated the government as it tries to revive growth in an economy growing at its slowest pace in a decade.

Earlier this week, Subbarao said the central bank needed greater independence before adopting a monetary policy committee structure. The draft law must be approved by the cabinet before being sent to parliament for discussion.

Raghuram Rajan, the finance ministry's chief economic advisor, who many expect to replace Subbarrao when his term ends in September, told Reuters last week he favoured clipping the power vested in the post of governor and supported a committee approach.

When it comes to making policy decisions, Subbarao in practice does take the views of staff and an advisory committee on board. But he often goes against the panel's advice, minutes of central bank meetings have shown.

Under the draft bill, which would replace 15 different financial sector laws, the seven member monetary policy committee would be headed by the governor and include two members appointed by the government in consultation with the bank along with three outright government appointees.

The draft bill said the government should set written objectives for the bank's monetary policy, to be reviewed every two years, as well as measurable medium-term targets. The written objectives would also lay out how the government would determine if the RBI has failed to meet them.

At present the RBI sets its own objectives in consultation with the central government. The bank does not officially target inflation.

The draft law also recommended stripping the bank of its government debt management function and setting up an independent body to carry out government bond sales.

"A central bank that sells government bonds faces conflicting objectives. When RBI is given the objective of obtaining low cost financing for the Government, this may give RBI a bias in favour of low interest rates which could interfere with the goal of price stability," the panel said in its report.


Source : economictimes.indiatimes.com