Responsibilities and authorities go hand in hand. If you don't give your team members adequate freedom and right to take decisions, you can't expect your team to produce desirable results. Any organisation that follows this practice has the best chance to make optimum use of resources.

However, the Financial Sector Legislative Reforms Commission (FSLRC) has a recommendation to hold Reserve Bank of India (RBI) responsible for inflation targets and effectiveness of monetary policies yet doesn't want RBI to enjoy autonomy.

What has changed?

In the current system, RBI governor decides on policy rates in consultation with the Technical Advisory Committee (TAC) but it is not obligatory for him to follow TAC recommendations.

Last year, Urjit Patel committee recommended that, decisions pertaining to monetary policy stance should be taken by the Monetary Policy Committee (MPC) of 5 members headed by the governor of RBI with occasional veto power to the governor to supersede the consensus view of the MPC.

On the other hand, draft of the Indian Financial Code (IFC) presented by FSLRC headed by retired Supreme Court Judge B.N. Srikrishna has recommendations that may severely limit the role of the centre bank in framing monetary policies.

Revised draft of IFC suggests that,
 

• MPC should be chaired by RBI Chairperson
   
• It should have one executive member of the Reserve Bank Board nominated by the Reserve Bank Board
   
• One employee of the Reserve Bank nominated by the Reserve Bank Chairperson; and
   
• Four persons appointed by the Central Government
   
• Besides, this Government may appoint its representative who will prepare a statement, approved by the Central Government to be made before the Monetary Policy Committee at each of its meetings but won't have any voting right.
   
• In the event of a tie amongst the members of the Monetary Policy Committee, the Reserve Bank Chairperson will have a second and casting vote
   
• The decisions of the Monetary Policy Committee will be binding on the Reserve Bank.
   

Moreover, the IFC also suggests that, public debt should be managed by the independent public debt management agency set up by the Central Government.

The Government and RBI have reached a consensus on inflation targeting but possibility of reaching an agreement on MPC looks remote, especially if the Government accepts all the recommendations of FSLRC. While RBI has clarified its stand on several recommendations of FSLRC without any bone of contention, RBI Governor has heavily criticised several areas of FSLRC report for proposals limiting the role of RBI as a regulator.

Seeing the stormy reactions in the media over FSLRC report, the finance ministry has quickly clarified its stance. Jayant Sinha, Minister of State for Finance told media that, "the cardinal principle we want to follow is that we have a genuinely independent central bank that is able to fashion monetary policy in a truly independent and objective manner and on behalf of India's long-term interest."

PersonalFN believes that, it would be too early to declare that, India's monetary policy framework is in danger. FSLRC report on IFC still has a status of "proposal"; unless Government approves and accepts recommendations made therein; RBI is unlikely to lose dominance it enjoys in framing monetary policies.

PersonalFN is of the view that, autonomy of RBI is important. Having said this, PersonalFN further believes that, there shouldn't be a clash between India's monetary and fiscal policy and thus harmony between RBI and the Central Government is greatly desired. The Government seeks opinion of all stakeholders by August 8, 2015.

If central Government, in deed, decides to water down the role of RBI in framing monetary policies; monetary policy would become more a political decision than purely an economic or a technical decision. Reaction of the debt market to such a decision would remain to be seen.

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