An independent RBI is a chimera, writes Charan Singh

An independent RBI is a chimera, writes Charan Singh: In recent months, the country has witnessed a raging debate on the independence of the central bank. It raises an important question: independence of whom, and independent of what? In literature...

It's about functional freedom within the contours of law, dear!

RBI’s independence

This refers to the well-researched article on RBI’s independence by Dr Charan Singh (The Hindu, ‘An independent RBI is a chimera’, September 21) which presumes there has been a clamour for autonomy or independence of the Reserve bank of India(RBI) by successive RBI governors.  Once they took positions, it has to be said to the credit of all RBI Governors who were in charge during the last 25 years (Dr Y V Reddy to Dr Raghuram Rajan), that all of them understood the evolution of RBI’s role in India’s economic development and the contours within which the Indian central bank can function to achieve its monetary policy objectives.

Inside RBI, all through, the debate has been about ‘functional autonomy’ to formulate and implement monetary policy and play the role assigned to the bank in regulating and supervising the institutional system in the financial sector. The institution has been taking in its stride ( and has not yet responded in public), the teasing by North Block by trying to boss over it by interference even in the implementation of a pension scheme which is fully funded from employees’
contribution and part-financed by RBI out of funds rendered surplus on discontinuance of Contributory Provident Fund.
 Occasionally, friction between North block and Mint Road did surface when the former came out with ‘policy prescriptions’ through media without any consultation with Mint Road. The elegance with which RBI handled such situations is part of history.
Dr Y V Reddy, Deputy Governor, RBI (who subsequently became Governor) concluded the Second Foundation Day Lecture at IIM, Indore on October 3, 2001, for which he chose ‘Independence of Central banks’ as subject, with the following prophetic observation:
“In the years to come, the sheer need to improve efficiency of operations will thrust upon the RBI a greater degree of autonomy and, therefore, a greater degree of accountability. In such a milieu, it is essential that the setting of goals and the policy processes will need to evolve in a transparent manner. For the central bank, these will be difficult times but also exhilarating times.”

The prophecy has come true. Dr Raghuram Rajan, in his last public address of his three year tenure as RBI Governor, speaking at St Stephen’s College, New Delhi on September 3, 2016 had this to say:
“When the responsibilities of the RBI are fuzzy, its actions can continuously be questioned. Instead, if the constitutional authorities outline a framework for the responsibilities of the RBI, it can take actions consistent with those responsibilities and be held (responsible) to outcomes. The inflation objectives recently set for RBI by the Government are an example of what is needed. Critics can lambast the RBI if it fails continuously to meet the objectives, but if they want it to lower interest rates even when the RBI barely meets its objectives, they should instead petition the Government to change the objectives.”
Quoted the above to make the point that there is clarity of policy perspectives within RBI and this institutional clarity has been understood by successive governors who have been responsible for RBI’s monetary policy stance.

M G Warrier, Mumbai 


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