Independence of the Central Bank

The article on the stand-off between the government and the Reserve Bank of India (rbi) on macro policy (“Government and RBI: No Real Stand-off over Macro Policy”, EPW, 11 April 2015) essentially argues  for some degree of independence of the government from the central bank and to make the latter more dependent on the government in the pursuit of policies and programmes. The reason offered is that the leadership of the RBI, chosen from an “epistemic community,” cannot function in the best interests of the people.  

With the spread of central banking across countries following the recommendation of the Brussels conference in 1920, central banks began enjoying varying degrees of conditional independence, initially to secure price and exchange rate stability and later with stress on growth too. Most of the countries cast an obligation on the central banks to keep the government informed of its policies or consult with it regularly. Conflict of central banking policies with government policy objectives was rare as in most countries the central bank operated at least in consultation with the treasury. In certain other countries, the central bank’s policies are subject to the government’s general directions. In India the picture was not different. The RBI maintained a close and continuous dialogue with the Ministry of Finance. Whenever strong differences arose, the government had the last say.