Independence and accountability: on RBI
Mains Paper 3: Economy
Prelims level: RBI
Mains level: Issues relating RBI autonomy and accountability
- The Reserve Bank of India (RBI) and the government give the
impression that they are not on the same page even as far as an
understanding of their roles is concerned.
- This may be seen in statements by them on websites, Twitter and in
the old-fashioned mode of the public lecture given by the Finance Minister
and a Deputy Governor of the RBI, respectively.
- The RBI suggests that its independence is being violated while the
government rationalises its intervention in terms of its concern for the
- The idea of central bank independence began to germinate some two
- 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
- 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 issue here was whether the bank should focus on inflation
alone or also on the level of employment.
- Within a decade of this debate, it had been conceded that the
focus would be exclusively on the former, and monetary policy came to be
identified with ‘inflation targeting’.
Concluding two points
- First, the discourse was solely among interlocutors from Western
democracies, ensuring the issues were those related to their economies.
- Second, even as the major central banks of the world shifted to
inflation targeting, in yet another example of American exceptionalism, the
U.S. did not revise the goals of the Federal Reserve.
- It was to continue focus on maximising employment while keeping
prices stable, a sensible recognition of a possible trade-off between these
- In India where for close to a quarter century political parties of
all hues appear to suggest ‘what is good for America is the best for India’,
this has been missed.
- In 2015 the RBI was by law, in line with a “modern monetary
policy”, expected to target inflation. It was to remain the banking
Stability of the economy
- There is reason to believe that some of the actions being sought
to be imposed on the RBI today could jeopardise the stability of the
- While acting as the lender of last resort can be stabilising,
under no circumstances would it be advisable to lower prudential norms in
the presence of stressed banks.
- The government’s concern for the health of the medium and small
enterprises is well-founded.
- They were among the most affected sections following the
demonetisation of 2016.
- The government wants to reach out to them, the right course would
be to provide interest rate subvention, rather than to force the RBI to
tweak its lending norms.
- There is a severe lack of judgment in loan melas promising online
sanction in less than an hour.
- There is the suggestion in this of the political business cycle, a
government trying to nudge the economy prior to an election.
- The resistance of the RBI top brass to this desperate action is
Enabling job creation
- There is a certain populism inherent in privileging inflation
control to justify extraordinarily high interest rates.
- While it would be bad economics to tolerate high inflation, the
absence of inflation by itself only benefits those in employment.
- It does not assure jobs to the unemployed. Thus a monetary policy
that ignores the impact of its actions on unemployment is not credible.
- The government and the RBI have always been on the same page as
far as inflation targeting is concerned.
- Inflation erodes the income of the poor conceals the possibility
that in the implementation such a policy could hold back job creation by
- The rising current account deficit, the slow growth of employment
and the disappointing performance of manufacturing.
- The sector most closely affected by high interest rates, should
prompt us to review how monetary policy is conducted in India.
- In the past, the RBI had a ‘multiple indicators approach’ which
paid attention to inflation, growth and the current account.
- The RBI should be left alone by the government to decide on the
right course of action. This derives not so much from a notion of central
bank independence as it does from the point of view of a credible governance
- The Government of India would have chosen the Governor,
participated in the choice of his deputies and had a say in the appointment
of even the independent members of the central board of the RBI.
- In addition, the board has representatives of the government on
- It should now be left to this body to decide on the precise
corrective action for banks with high NPAs.
- The desirable state of liquidity and the prudential norms to be
observed by banks.
- The RBI is the banking regulator after all, and for the government
to attempt to direct it would constitute micro-management.
Q.1) Which among the following sectors is/are covered under the Index of
Industrial Production (IIP)?
Select the correct answer using the code given below.
(a) 1 and 2 only
(b) 2 only
(c) 1 and 3 only
(d) 1, 2 and 3
Q.1) Why autonomy and accountability is so important for RBI?