Economics Current

Autonomy of RBI

Autonomy of RBI
The Reserve Bank of India is the central bank of the nation. It usually functions as an autonomous entity without any control from the government of India. The government can, at most, make suggestions to the RBI about certain matters but it is up to the central bank to implement the suggestions. Ever since Demonetisation was pursued by the government in 2016, there has been a heated debate regarding the extent of the autonomy of the RBI, as there were allegations of the government impinging upon the central bank’s autonomy. In this context, we shall look at the clauses that determine the autonomy of the RBI and measure its extent. What is the RBI Act? The Reserve Bank of India Act, 1934 is the legislative act under which the Reserve Bank of India was formed. This act provides a framework for the supervision of banking firms in India. Section 7 of the RBI Act empowers the central government to issue directions in public interest from time to time to the bank in consultation with the RBI Governor. This section also provides the power of superintendence and direction of the affairs and business of RBI to the Central Board of Directors. Therefore, it is clear that section 7 empowers the government to issue directions in public interest to the central bank, which otherwise does not take orders from the government. The RBI has had differences with the government. These differences can be summarized as: •Issues regarding Prompt Corrective Action (PCA): The government has asked the RBI to give exemption to power companies under the PCA framework. The government wants it to make lending rules under PCA flexible, as it could help reduce pressure on MSME (Ministry of Micro, Small and Mini Enterprises) through the availability of credit. However, the RBI has said that this will jeopardize all efforts of dealing with the country’s Non-Performing Asset (NPA) Crisis. •Section 7 of the RBI Act, 1934: As discussed above, section 7 of the RBI Act empowers the government to issue directions to RBI in public interest after consultation with the RBI governor. However, since section 7 had never been used in the past it is unclear as to how it operates. •RBI Surpluses: The RBI earns interests from the domestic and foreign bonds and the income from this is used in running the operations and rest is accrued as surplus. Out of this surplus, the RBI holds some amount to itself as equity capital to maintain its creditworthiness and pays the rest to the government of India. The government thinks that RBI should pay more dividends as the building of buffers like the Contingency Fund and Asset Reserve by the RBI has been far in excess of what is required to maintain creditworthiness. The RBI, however, says that increasing the dividend payment to the government can be inflationary as there will be more money in the market and this may harm macroeconomic stability in the nation, which is the RBI’s job to maintain. What do RBI governors have to say? Ex-RBI governors have also issued statements over the autonomy of the central bank. Y V Reddy held that RBI exercises autonomy under three functions- operational issues, policy matters, and structural reforms. He believed that for these three functions, there was a varied degree of autonomy exercised by the bank- it should have total freedom in the first case while for the other two there should be close coordination with the government. What is the stance taken by the government? The statements put out by the government underlines that the RBI is autonomous but within the framework of the RBI Act, thus it cannot make claims for absolute autonomy. Constitutionally, RBI is not independent, it is a part of the government and thus accountable to people. The independence of the central bank is maintained as it has positive externalities on the economy, but this autonomy comes with accountability. Hence it can be said that by invoking section 7 of the RBI Act 1934, the government is merely acting within power given to it under the RBI Act. The autonomy of the body also depends on the subject and the context. Granting complete autonomy to such an institution is certainly undemocratic.

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