New Delhi, (The Telegraph): The Narendra Modi government is preparing to set a virtual dual mandate for the RBI: cap inflation and spur growth. It has also discarded the veto power of the RBI governor.

"The objective of monetary policy is to achieve price stability while striking a balance with the objective of the central government to achieve growth," says a revised draft of the Indian Financial Code that was put up today on the finance ministry's website.

This is the first time that the word "growth" has been wormed into the monetary policy objective even if it is a little tangential. But it is clear that the RBI will be pressured to adopt measures to help the government achieve its responsibility of cranking up economic growth.

The finance ministry has invited comments on the draft till August 8.

The GDP growth in the year ended March 31 was estimated at 7.4 per cent under a revised methodology for national accounts adopted in January.

The original financial code - drawn up two years ago by the financial sector legislative reforms commission, headed by Justice B.N. Srikrishna - did not explicitly refer to growth though it did provide a framework for a consultation process between the government and the central bank before the enunciation of a "predominant objective of the Reserve Bank in the discharge of its monetary policy function" (read inflation) and "any additional objectives if relevant".

The Modi government has increasingly come under fire for its failure to jump-start industrial growth, which slowed to 2.7 per cent in May from a revised estimate of 3.35 per cent in April - triggering a clamour for a third interest rate cut since January.

RBI governor Raghuram Rajan has been digging his heels in to resist pressure for another rate cut, contending that the spectre of inflation hasn't disappeared.

Consumer price inflation - which has served as the anchor for the conduct of monetary policy since September 2013 when Rajan assumed office - has nudged up to 5.4 per cent in June from 5.01 per cent in May, prompting analysts to discount the possibility of a rate cut on August 4 when the RBI is due to review its monetary policy.

A dual mandate for the RBI will mirror the one that the US Congress set for the Federal Reserve in 1977.

The US Federal Reserve is committed to "maintain long-run growth of the monetary and credit aggregates commensurate with the economy's long run potential to increase production, so as to promote effectively the goals of maximum employment, stable prices and moderate long-term interest rates." The Fed tracks the twin objectives by relying on inflation and unemployment data.

In India, the draft of the financial code says the central government will hold consultations with the RBI every three years and set the inflation target for each subsequent financial year.

Back in February, the finance ministry and the RBI had signed an agreement that committed the central bank to a retail inflation target of 6 per cent by January 2016.

It also set a medium-term target of 4 per cent (with a latitude of 2 per cent on either side) to be achieved by the end of March 2018. These targets had been suggested by RBI deputy governor Urjit Patel in his report in January 2014.

The government has also proposed to form a seven-member committee to frame monetary policy, overturning the current system that makes the RBI governor the sole arbiter.

The RBI governor will be chairperson of the monetary policy committee, which must meet at least once every two months. It will have two other RBI officials: an executive member of the RBI board to be nominated by the board; and an employee of the RBI to be nominated by the RBI governor. The four others will be nominated by the Centre.

The repo (the rate at which banks borrow short-term funds from the RBI) will be decided through a majority vote.

The government has also decided to curtail the powers of the RBI governor.

The Srikrishna committee had suggested that in "exceptional and unusual circumstances", the RBI governor would have the right to supersede any decision taken by the monetary policy committee if he disagreed with the other members.

No such power is conferred on the RBI governor under the new code. "The decisions of the monetary policy committee will be binding on the Reserve Bank," the new draft financial code says.

The RBI must publish a document explaining the steps it will take to implement the decisions of the monetary policy committee.

However, if there is a tie among members of the monetary policy committee, the RBI governor will have a second and casting vote, it adds.

The Srikrishna report had also provided for a seven-member committee. But it had provided for five external members, two of whom were to be appointed in consultation with the RBI governor.

In the process, the government has completely rejected Patel's recommendations that gave the Centre no say in the composition of a five-member monetary policy committee.

The Patel report had suggested that the committee should have the RBI governor, the deputy governor in charge of monetary policy and the executive director in charge of monetary policy as members. It added that the RBI governor and deputy governor would then pick two external members.Accepting a suggestion in the Srikrishna report, the new financial code says the central government will nominate one representative to attend all meetings of the monetary policy committee but he will not have a vote.

If the inflation target is not met, the RBI must set out in a report to the central government the reasons, the remedial actions it proposes to take and the time for achieving the goal.

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