Indian Financial Code: Salient Provisions

Indian Financial Code: Salient Provisions

Question : A new era in monetary policy formulation is set to start with the commencement of the Indian Financial Code. However, the draft code considerably reduces the powers of the RBI governor. Examine the main provisions of the draft code.

- A fresh era in monetary policy formulation has been established as the Union Finance Ministry has released the revised draft of the Indian Financial Code

- It has also provided for the setting up of the Monetary Policy Committee/MPC for debating on monetary issues and deciding policy rates

- This move is in consonance with practices of developing nations where central banks have followed the committee approach to assess monetary policy issues

- RBI follows the monetary policy regulatory authority TAC or Technical Advisory Committee on key issues

About TAC

- TAC advises the apex bank on the monetary policy stance on macroeconomic and monetary developments

- TAC comprises officials from RBI apart from external experts

- Till now, the RBI had the power to veto the TAC. But the draft IFC submitted by Financial Sector Legislative Reforms Commission headed by former SC judge B. N. Srikrishna has indicated that MPC members have to be appointed following due consultations between GoI and RBI

- It has also made the recommendation for the government to have 3 nominees on the 7 member MPC

- Though the FLSRC has recommended veto power for the RBI governor, revised draft of IFC vests the government with the power to nominate 4 members of the MPC

- No veto power will be provided to the Governor and at best, he will be permitted a casting vote in case of a tie

- In the context of the relationship between fiscal and monetary bosses, this moves the RBI’s autonomy into a grey area

- The IFC Code pertains to setting up of financial agencies, setting up and structure of tribunal as well as allocation and regulation of financial services

- It also discusses the functioning of financial bodies such as boards of financial agencies, strength and composition of boards, advisory councils, decision making, accountability mechanisms and funding for financial agencies

- It also indicates the disposal of applications, information and inspections as well as investigations and offences as financial agencies executive functions

- Financial bodies are also given quasi judicial functions such as show case notices and orders, administrative law, enforcement actions, procedure for enforcement actions and penalties.

- Code also clarifies financial consumer protection, contracts, trading and market malpractices, prudential regulation, capital controls, resolution of financial services providers, development council and financial stability (provisions of review), offences, functions, tribunal powers and duties

- as well as public debt management agency, powers and duties of tribunal, miscellaneous and schedules

Facts and Stats

- Revised draft of the Indian Financial Code released in July 2015 has proposed a 4 member central government and three member RBI rep ratio while it was the other way around previously

- FSLRC was established in March 2011 for rewriting the code for the regulation of the financial sector

- It was also proposed for the introduction of principles for financial regulation and constituting powers, objectives and interactions of financial agencies

- In 2013, commission submitted its report in 2 volumes namely Analysis and Recommendation as well as Draft Law