SME Times News Bureau | 31 Jul, 2015
American research firm Moody's
Analytics, in a report on Thursday, warned against the NDA government's
moves to tamper with the autonomy of the Reserve Bank of India in
deciding on interest rates, as being potentially damaging for the
economy.
"We believe that a government-elected panel undermines
the RBI's independence. Moving to the new model would severely dent the
RBI's competency: Credibility would be lower, politics would drive
decisions, and transparency would be reduced," the economic research
conmpany said.
The government last week released the draft Indian
Financial Code, which proposes to remove the RBI governor's veto right
in the monetary policy committee.
Besides taking away the RBI
governor's authority to veto interest rate decisions, the draft also
proposed that the monetary policy committee would have four
representatives of the government and only three from the central bank,
including the RBI "chairperson".
"Overall, we believe that
tampering with the central bank's independence would make it difficult
to anchor inflation expectations. This would weigh on India's economic
prospects, particularly financial market stability," said the Moody's
report.
"But given the criticism of the draft bill, it is unlikely to pass parliament," it added.
Terming
the measure as a "dangerous road ahead", it said India's monetary
policy, with Governor Raghuram Rajan at the helm, has been effective.
In
the original draft, the RBI "chairperson" had power to "supersede the
decision" of the committee in "exceptional and unusual circumstances".
Finance
Minister Arun Jaitley, in his February budget, had announced a monetary
policy committee pact earlier with the RBI that will reduce the
governor's power to act alone. The monetary policy committee and an
official inflation target for the RBI are going to come about through
the biggest post-Independence overhaul of the RBI Act, 1934.
However
in May, in a big backtrack by the government, Jaitley withdrew from the
Finance Bill the clauses pertaining to setting up of a public debt
management agency (PDMA) and the amendments to the RBI Act that would
have taken away its powers to regulate government securities.
The
United Forum of Reserve Bank Officers Employees had earlier written to
MPs and chief ministers of various states that the changes, if
implemented, would cripple the functions of the central bank. It said
the proposed changes would curtail the authority of the RBI and render
it totally ineffective in discharging its responsibilities on monetary
policy, financial stability and targeting inflation.
In fact,
Jaitley on Monday said the government will decide on the draft Indian
Financial Code only after comments from stakeholders.
"Financial
Sector Legislative Reforms Commission has made its recommendations,
which have been made public for comments. Only after the comments are
received that the government will take a view," he said.
Moreover,
Minister of State for Finance Jayant Sinha also told reporters here on
Monday that the government will consult the RBI before taking a decision
on the formation of the monetary policy committee, saying the proposal
doesn't reflect the government's viewpoint.