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The revised draft of the Indian Financial Code (IFC), released by the finance ministry has proposed the taking away the RBI chief's authority to veto the interest rate decision of the Central bank's monetary policy committee. The draft has also proposed that the all-powerful committee will be having four representatives of the government and three from the Central bank, including the 'RBI chairperson'. The draft talks of 'RBI Chairperson' and not 'RBI Governor'.

"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," said the draft, on which the ministry has invited comments till August 8.

The RBI "must constitute a monetary policy committee to determine by majority vote on the policy rate required to achieve the inflation target," said the draft.

"A government's active role in monetary policy making risks undermining the Central bank's independence and might result in conflict of interests in terms of broader economic priorities," Radhika Rao,an economist, DBS, Singapore said.

The IFC is conceived as an overarching legislation for the financial sector, which proposes a monetary policy committee that will be entrusted with the task of deciding the key policy rate and chasing the annual retail inflation target has to be decided by the government in consultation with the RBI.

By Premji