THE GIST of Editorial for UPSC Exams : 05 November 2018 (Eroding the functional autonomy of RBI)

Eroding the functional autonomy of RBI

Mains Paper 3: Economy
Prelims level: RBI
Mains level: RBI functional autonomy


  •  The history and main points of contention will be familiar to readers of this newspaper and need not be rehearsed here.

  •  The crux is that the government appears to wish to weaken or erode the functional (if not legal) autonomy of the RBI, by imposing its will across a range of areas—including, judging by press reports and what I have been told by credible sources, an attempt to extract some of its “excess reserves” and put those into government coffers.

  •  Some reports suggest that the Union ministry of finance is eyeing ₹1-2 trillion of the RBI’s reserves, which is a not inconsiderable sum of money and which would be unprecedented in the modern history of the institution.

Why autonomy is so important?

  •  Section 7, which permits it to direct the RBI to undertake specific actions in the national interest.

  •  It is not necessary for me in this space to repeat the canonical arguments for central bank independence.

  •  The deputy governor Viral Acharya superbly did just this in his recent Shroff memorial lecture, which brought the dust-up between the RBI and the government into public view.

  •  The governments are tempted to prod the central bank into excessively loose monetary policy, as this can help temporarily pep up the economy useful in the run-up to an election but the cost is higher and more variable inflation in the long run, with no real economic gain.

  •  That is why most advanced economies and some emerging economies have firewalled the central bank from political interference, either de jure or de facto.

  •  The bitter irony in the Indian case is that it is the Modi government that enshrined the monetary policy framework agreement (based on inflation targeting) into the RBI Act shortly after it came to power in 2014, at the stroke of a pen giving.

  •  India is a state of the art monetary policy framework as against the archaic framework that had prevailed until that point.

The position of RBI governor

  •  The Modi government’s most important economic reforms and there is now serious danger that they themselves will unravel it for short-term political gain.

  •  The long-term damage to the Indian economy will be considerable if such short-run political considerations are allowed to prevail.

  •  A word must be said about the man at the centre of the storm.

  •  When he became governor in late 2016, Patel had the unenviable task of presiding over the aftermath of the government’s demonetization decision, which was handed to him as a fait accompli.

  •  He could have taken the easy way out and resigned, which would have plunged the process into chaos and made the pain of demonetization much worse than it ended up being.

  •  The flamboyant and extrovert Raghuram Rajan was always going to be a tough act to follow, but Patel has more than acquitted himself with honour and distinction.

  •  Indeed, I daresay that judged by what a central banker is supposed to do — which is being a central banker, rather than a public intellectual who holds forth on everything under the sun—Patel has been more successful than Rajan.

Way forward

  •  The putative repercussions in global financial markets, which are sure to be severe were Patel to quit or be sacked.

  •  It will stay the government’s hand, and induce them to walk away from this foolish and entirely avoidable fracas with the central bank.

  •  Apart from dire consequences emanating from global markets, it cannot possibly be a good development for the Indian political economy if the central bank is robbed of its hard won functional autonomy.

  •  The monetary policy framework will soon be rubbished.

  •  Indian monetary policy will become erratic and unpredictable, yet again, something we thought we had confined to the past.

  •  The discipline provided by an inflation targeting monetary policy, which punishes fiscal profligacy through its feedback into inflation, fiscal rectitude, too, will be thrown to the winds.

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General Studies Pre. Cum Mains Study Materials

Prelims Questions:

Q.1) Which of the following is/are a part of the participatory development process?

1. State
2. NGOs
3. Pressure groups
4. Cooperatives

Select the correct answer using the codes given below.

a) 1, 2 and 3 only
b) 1 ,3 and 4 only
c) 2 ,3 and 4 only
d) 1 ,2, 3 and 4
Answer: D

Mains Questions:
Q.1) Why autonomy is so important for RBI?