Finance Ministry releases revised draft Indian Financial Code

The Financial Sector Legislative Reforms Commission (“FSLRC”), which was set up on March 24, 2011, for re-writing the financial sector laws to bring them in harmony with the current requirements, had submitted its report to the Government in March, 2013 in two volumes, which included the first draft of the Indian Financial Code (“IFC”). This draft IFC had been further revised in the light of the comments received and the Finance Ministry on 23rd July, 2015 issued the revised draft of the IFC, to which the  Ministry has invited comments till 8th August, 2015.

The revised draft proposes that the Reserve Bank of India (“RBI”) must constitute a Monetary Policy Committee (“MPC”) to determine by majority vote on the Policy Rate required to achieve the inflation target. The draft also suggests that the inflation target for each financial year will be determined in terms of the Consumer Price Index by the Central Government in consultation with the RBI every 3 years.

Currently the RBI Governor consults a Technical Advisory Committee, but does not necessarily go by the majority opinion while deciding on the monetary policy stance. The IFC draft further stated that the Committee will be headed by ‘RBI Chairperson’ and not the ‘RBI Governor’.  The other members of the panel would be one executive member of the RBI Board, one employee of the RBI and four persons appointed by the Central Government, thus giving full control to the Government on policy rate. The panel must meet every 2 months & decisions in a meeting of the MPC must be taken by a majority vote of the members present and voting.

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