RBI Governor Raghuram Rajan
Reserve Bank of India (RBI) Governor Raghuram Rajan listens to a question during an industry event in Mumbai, India, August 20, 2015.Reuters

The government has reportedly circulated a draft note in which it proposed to scrap Reserve Bank of India (RBI) governor's veto power in deciding interest rates.

The draft note recommends formation of a seven-member committee to decide on the monetary policy in the country.

The proposed committee comprises of four members from the government and the remaining three members from the RBI, according to a draft note accessed by NDTV.

In July, the government came under fire when it was reported that it was proposing to clip the central bank governor's veto power.

"In particular, the recommendation that the majority of the panel be appointed by the government is a cause for concern given the track record of previous governments attempting to dampen the central bank's power and independence," Capital Economics had said in a note in July.

The members nominated by the RBI include deputy RBI governor, an officer and a non-voting member from the government.

The committee will be chaired by the RBI governor but without veto power. However, the RBI governor will possess a casting vote if there is any tie in votes from the committee members.

A decision on cut or a hike in lending rates will be based on the majority vote and the committee is empowered to set inflation targets.

Under the existing mechanism, the RBI governor consults a technical advisory committee before deciding on key policy rates, while having the discretion to accept or reject the recommendations of the committee.

Earlier, RBI governor Raghuram Rajan had favoured scrapping the veto power of the RBI head, saying "it would be better for a committee to decide the key rate rather than one individual."

"We believe that tampering with the central bank's independence would make it difficult to anchor inflation expectations. This would weigh on India's economic prospects, particularly financial market stability," Moody's Analytics had said.

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