Panel rattles market with plan to clip central bank’s wings


Proposals from a government panel reviewing monetary policy rattled markets on Friday, as foreign and domestic traders said a move to increase the government’s weight in decision-making could undermine the Reserve Bank of India (RBI)’s independence.

Under the panel’s latest proposals, published late on Thursday and part of a broad and lengthy financial overhaul, the government would appoint four out of seven positions on a planned monetary policy committee.

The RBI would appoint three — one more than under earlier plans, but still less than the government.

Under the proposal, the RBI governor also has no veto power, though he did under an earlier iteration of the plan.

“The government appointing the majority of the external members in the monetary policy committee will dilute the independence of the RBI,” said Rupa Rege Nitsure, chief economist at L&T Finance Holdings, who worked on a central bank report on monetary policy published in 2014.

“In a political economy set up, it is difficult to have intellectual independence.”

Traders said they worried that if the proposed changes were implemented it could hurt the RBI’s ability to push ahead with policies like inflation targeting, which has helped contain endemic price rises.

“After buying into India given the way RBI has managed inflation, forex market, foreign investors will be worried about the credibility of the decision-making process if the government has a bigger say than the RBI,” one foreign bank trader said.

Government officials directly involved with the drafting process, however, played down market concerns. They said the draft was not final, and the RBI would respond in time.

The proposals, from the Financial Sector Legislative Reforms Commission (FSLRC), are a revised version of a previous report that was published in 2013.

RBI Governor Raghuram Rajan said that report was ‘schizophrenic’, and would turn the RBI into a ‘paper tiger’.

The RBI targets consumer price index inflation at six per cent by January 2016 and four per cent by March 2018.