RBI’s autonomy

Different interpretations of autonomy:

The idea of central bank independence began to germinate some two decades ago, this was understood to mean a ‘functional’ independence, the bank would be unconstrained by the government in its functioning, which includes both the instruments it uses and how it uses them. However, its autonomy was not to extend to ‘goal’ independence. What the goals of the central bank should be were to be chosen by the government without reference to the bank.

The main contentious issue was whether the bank should focus on inflation alone or also on sundry issues i.e- level of employment generation

Within a decade of this debate, it had been conceded that the focus of RBI would be exclusively on monetary policy with price stability through ‘inflation targeting’.

RBI’s autonomy on international standards

According to a paper published in the International Journal of Central Banking in 2014, RBI was listed as the least independent among 89 central banks considered under the study.

These rankings are likely to have improved since the adoption of inflation targeting in February 2015 and formation of Monetary policy committee in October 2016.

However, vacancies in RBI’s board and government’s reluctance to fill them up impugns the intention of the government. Further, Financial Sector Legislative Reforms Commission was formed which made various recommendations to cut down RBI’s powers. In 2013, a financial sector monitoring body, called Financial Stability Development Council was established which was to be chaired by the Finance Minister.

In essence, the RBI Act 1934, does not empower RBI absolute autonomy. However, it does enjoy some independence when it comes to performing its regulatory and monetary functions

RBI’s grievances

• Reserve Bank of India wants more powers over regulating public sector banks (PSBs).
• Government should not dictate the quantum of its surplus that can be paid as annual dividend.
• Centre has suggested a separate payments regulator.

RBI Governor Urjit Patel told a parliamentary panel in June that it does not have enough powers over PSBs. But the RBI does have nominee directors on bank boards.  Therefore, RBI can conduct physical inspection at banks and financial audits. It can also execute the process of mergers between banks whenever a bank has been on the verge of collapse.

So, the RBI does have adequate control over PSBs but may not be exercising it fully.

Way Forward:

The government’s concern for the health of the medium and small enterprises is genuine and warranted. Their performance is adversely affected after demonetisation, 2016.

 Therefore, interest rate subvention for these firms are well justified. On the contrary RBI’s insistence for adhering to lending norms is gratuitous.

Monopoly of interpretation and choice of instruments of intervention would always, in an uncertain economy, continue to be a matter of debate.There is need to pay due regard to both autonomy and accountability. There has to be a forum within our democratic structure where the RBI is obligated to explain and defend its position. Different countries have taken different routes and by and large each model is appropriately tuned to their specific contexts. The oft-quoted US example is a good model to work upon. India may adopt it with some suitable modifications.

We need an appropriate and structured forum to strike a balance between unrestrained autonomy and blatant political intervention.