RBI and its independence

Has demonetisation dented the autonomy of the RBI? An analysis.

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RBI and its independence



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The
Reserve Bank of India is the central bank of India, and is not staffed by elected representatives of people, but people who are selected through meritocracy – i.e. bureaucrats and technocrats. What are its main functions? (1) To efficiently conduct India’s Monetary Policy, (2) To set inflation targets, (3) To manage government debt. No central bank in the world can act on its own entirely – it has to ultimately be answerable to an elected government (in any democracy) or the Parliament itself. Otherwise it can be called the autocracy of the unelected! Any Central Bank (RBI included) always strives for a certain inflation target, and price stability. The RBI also tries to create a low or a medium-inflation situation and hence conducts its monetary policy accordingly.

Any government faces the pressure of elections regularly, and is likely to dump fiscal prudence in favour of policies that garner votes – hence doling out of subsidies, hence expected inflation in the system. That is why Central Banks are needed. India created the Monetary Policy Committee (MPC) in 2016. Before that, only the Governor of the RBI would (in consultation with his team) decide the entire monetary policy targets, including benchmark interest rates. The whole concept of “freedom”, “independence”, “autonomy”, “integrity” are loaded terms. They cannot be seen in isolation. If only the Governor had all the powers, would that not be concentration of powers? (a good counter-argument). The NITI Aayog has even suggested that the debt management function be separated from the RBI and given to an independent debt management agency. The criticism of demonetization 2016 being an attack on RBI’s autonomy has both sides to it. Is the government wrong in exercising its sovereign power? Would the RBI be wrong in resisting big changes that the nation needs? Are both wrong in some way? For detailed reading of the relevant laws (The RBI Act), go to Bodhi Resources page.   




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Bodhi Booster: RBI and its independence
RBI and its independence
Has demonetisation dented the autonomy of the RBI? An analysis.
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