ISSN (Print) - 0012-9976 | ISSN (Online) - 2349-8846

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Where Is the Reserve Bank of India?

The notion of autonomy may be exaggerated, but the way the central bank is being pushed around is cause for concern.

The decisions taken by the Reserve Bank of India (RBI) as the economy has tried to cope with the global financial crisis have been subject to scrutiny twice over – for their effectiveness as well as for signs of whether the RBI is now doing the bidding of the Ministry of Finance. The change of guard at the helm of the central bank was coterminous with the global descent of the financial world into a crisis. That the previous head of the central bank, Y V Reddy, fiercely guarded the independence of the central bank, and that the new governor, Duvvuri Subba Rao, moved from being secretary at the Ministry of Finance to Mint Street, has lent tension to the scrutiny of the RBI’s actions.

To begin with, there must be serious reflection on the notion of central bank autonomy, for autonomy places the making and implementation of monetary policy in an abstract realm un-touched by the pulls and pressures of a democracy. The fact is that in the Indian model of central banking there is not much dejure independence. The finance secretary of the Government of India sits on the board of the RBI and there are regular discussions of policy matters between the central bank and the Ministry of Finance. The Reserve Bank of India Act, 1934 unambiguously states, “The Central Government may from time to time give such directions to the Bank as it may, after consultation with the Governor of the Bank, consider necessary in the public interest”. In fact, it is well known that before any major policy announce-ments the governor of the RBI tends to brief the finance minister – sometime even in person. Similar consultations take place before the union budget as well. Of course, there are strong dis-agreements. The most well-known and widely noticed example in recent years was the open dissent in 2005 by the RBI of the Ministry of Finance’s unhealthy desire to encourage capital inflows via participatory notes. (As events have shown – both in terms of the inflationary surge during the first half of 2008 and the ongoing flight of foreign capital, the RBI was prescient and the ministry dead wrong.)

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