The Reserve Bank of India (RBI) and the government give the impression that they are not on the same wavelength, even in terms of understanding their functions.
The RBI suggests that its independence is violated, while the government rationalizes its intervention according to its concern for the economy.
Define autonomy on the side of the central bank or the government:
The idea of the independence of the central bank began to germinate about two decades ago, it was understood that it meant a "functional" independence.
In other words, the government would not limit its operation, which includes both the instruments it uses and the way in which it uses them.
However, their autonomy did not extend to the independence of the "objective". What would the central bank's objectives be if they were elected by the government without reference to the bank?
The main problem in this case was whether the bank should focus only on inflation or also on the level of employment.
During the ten years of this debate, it had been admitted that the focus would be exclusively on the former and that monetary policy was identified as "directed towards inflation".
Where is the RBI in terms of autonomy?
According to an article published in 2014 in the International Journal of Central Banking, RBI was the least independent of the 89 central banks examined in the study.
These classifications have probably improved since the adoption of the inflation target in February 2015 and the formation of the Monetary Policy Committee in October 2016.
However, the vacancies on the RBI board and the reluctance of the government to fill them raise questions about the decisions made and whether or not the appropriate deliberations on these decisions are being carried out.
During the previous government, a legislative reform committee of the financial sector was formed. He has made several recommendations aimed at reducing the powers of the Central Bank.
In 2013, a financial sector supervisory body called the Financial Stability Development Board was created. It should be chaired by the Minister of Finance.
In essence, the RBI Act of 1934 does not give the RBI absolute autonomy. However, it enjoys a certain independence in the exercise of its regulatory and monetary functions.
What is the RBI about?
First, the Reserve Bank of India wants more powers to regulate public sector banks (PSB).
Secondly, he believes that the government should not dictate the amount of its surplus that can be paid in the form of an annual dividend.
And third, it is unhappy that the Center has suggested the creation of a separate payments regulator.
RBI governor Urjit Patel told a parliamentary panel in June that he did not have enough powers over the PSB. But the RBI has appointed directors to the boards of banks.
Lead physical inspection in banks and financial audits. He also orchestrated bank mergers when a bank was about to collapse (for example, Global Trust Bank merged with Oriental Bank of Commerce).
As a result, the RBI has adequate control over the BSP, but may not fully exercise it.
WAy Forward;
The government's concern for the health of small and medium-sized enterprises is well-founded.
After all, they were among the most affected sections after the demonetization of 2016.
If, in a spirit of contradiction, the government wishes to address them, it would be prudent to grant a subsidy to the interest rate instead of forcing the RBI to change its credit standards.
There is a serious lack of judgment on the part of lenders who promise a fine online in less than an hour. The political economic cycle is mentioned. A government is trying to boost the economy before the elections.
The resistance of the RBI to this desperate action must be understandable.
Conclusion;
The monopoly of interpretation and the choice of intervention instruments will always be debated in an uncertain economy.
It is necessary to pay due attention to both autonomy and responsibility. There must be a forum within our democratic structure where the RBI is obliged to explain and defend its position.
Different countries have taken different routes and, in general, each model fits perfectly into their specific contexts.
The frequently quoted American example is a good model to use.
The Federal Reserve Chairman's presentation to Congress makes the public more public and transparent, but that does not detract from autonomy.