The revised draft of Indian Financial Code (IFC) was released on 23 July by the Finance Ministry. The IFC is conceived as an overarching legislation for the financial sector, proposes a monetary policy committee which will be entrusted with the task of deciding the key policy rate and chasing the annual retail inflation target to be decided by the government in consultation with RBI.
Key Points
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The draft proposed that the all-powerful committee would have four representatives of the government and only three from the central bank, including the ‘RBI Chairperson’.
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The draft talks of 'RBI Chairperson' and not 'RBI Governor'. RBI is headed by a Governor, at present.
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Ther draft proposed taking away RBI Governor’s authority to veto the interest rate decision of the central bank's monetary policy committee.
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The draft syas, inflation target for each financial year will be determined in terms of the Consumer Price Index (CPI) by the Central Government in consultation with the Reserve Bank every three years.
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RBI must constitute a Monetary Policy Committee to determine by majority vote on the Policy Rate required to achieve the inflation target.
The first draft, submitted in March 2013, too had talked about the committee and majority vote, but gave powers to RBI chairperson to supersede the decision of the panel. It said, in exceptional and unusual circumstances, if the RBI Chairperson disagrees with a decision taken at a meeting of the Monetary Policy Committee, the RBI Chairperson will have the right to supersede such decision. This provision was dropped in the revised draft. -
As per the revised draft there will be three members from the RBI side and four from the central government, thus giving full control to the government on policy rate.
Main Modifications
Strengthening the regulatory accountability of financial agencies; Removing the provision empowering Financial Sector Appelate Tribunal (FSAT) to review Regulations; Rule-making and operational aspects of capital controls, monetary policy framework and composition of the Monetary Policy Committee (MPC); Regulation of systematically important payment system and others, removing the provision of special guidance etc.
Further the modifications have taken into consideration the enactments subsequent to the submission of the FSLRC report; namely The Pension Fund Regulatory and Development Authority Act, 2013 (PFRDA Act) and Securities Laws (Amendment) Act, 2014. However, the modifications in the revised Draft IFC remain consistent with the overall structure and philosophy of the FSLRC Report.
The Financial Sector Legislative Reforms Commission (FSLRC) set up on 24 March 2011, for re-writing the financial sector laws to bring them in harmony with the current requirements, submitted its Report to the Government on March 22, 2013.
The Commission recommended a non-sectoral, principle-based legislative architecture for the financial sector, by restructuring existing regulatory agencies and creating new agencies, wherever needed for better governance and accountability.
Further the modifications have taken into consideration the enactments subsequent to the submission of the FSLRC report; namely The Pension Fund Regulatory and Development Authority Act, 2013 (PFRDA Act) and Securities Laws (Amendment) Act, 2014. However, the modifications in the revised Draft IFC remain consistent with the overall structure and philosophy of the FSLRC Report.
The Financial Sector Legislative Reforms Commission (FSLRC) set up on 24 March 2011, for re-writing the financial sector laws to bring them in harmony with the current requirements, submitted its Report to the Government on March 22, 2013.
The Commission recommended a non-sectoral, principle-based legislative architecture for the financial sector, by restructuring existing regulatory agencies and creating new agencies, wherever needed for better governance and accountability.
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