Arun Jaitley and Raghuram Rajan at the Indira Gandhi Institute of Development Research
India's Finance Minister Arun Jaitley (L) speaks to Reserve Bank of India (RBI) Governor Raghuram Rajan during a convocation ceremony for students at a university in Mumbai January 9, 2015.Reuters

The revised draft of Indian Financial Code (IFC) released on Thursday contains a proposal to scrap Reserve Bank of India (RBI) governor's veto power in deciding interest rates.

The proposal is being seen as yet another indication of the widening rift between the government and the central bank governor.

If the new proposal is implemented, the RBI governor loses the power to reject the decision made by the central bank's monetary policy committee on key lending rates.

Besides, the draft has a proposal for including four representatives from the government in the "all-powerful committee" and only three from the RBI. The three representatives from the central bank also include 'RBI chairperson', which too is being read differently. 

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.

The IFC talks about forming a monetary policy committee, which will be entrusted with the responsibility to decide interest rates.

However, the government is proposed to decide on targeting the annual inflation rate in consultation with the RBI, according to the draft.

"Inflation target for each financial year will be determined in terms of the consumer price index by the Central government in consultation with the Reserve Bank every three years," Business Today reported, citing the draft.

"The RBI must constitute a monetary policy committee to determine by majority vote on the policy rate required to achieve the inflation target," it said.

The Central government's proposal to include four of its representatives in the committee is being seen as an effort to have greater control over decisions on policy rates.

"A government's active role in monetary policymaking risks undermining the Central bank's independence and might result in conflict of interests in terms of broader economic priorities," Radhika Rao, economist, DBS, Singapore, told news agency Reuters, according to the BT report. 

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