Report

Central Bank Independence

- Special reference to RBI Autonomy, India

Macroeconomic Project Report

Please note:
UNCONTROLLED VERSION WHEN PRINTED OR SAVED LOCALLY
Central Bank Independence
– Special reference to RBI Autonomy, India

Acronyms and abbreviations

Group # 7, EGMP 49, IIM Bangalore Page 2 of 12

Central Bank Independence
– Special reference to RBI Autonomy, India

Terms and definitions

Group # 7, EGMP 49, IIM Bangalore Page 3 of 12

Central Bank Independence
– Special reference to RBI Autonomy, India

Contents

Acronyms and abbreviations ...................................................................................................... 2

Terms and definitions................................................................................................................. 3
1 Legacy of Central Bank and its Independence ...................................................................... 6
1.1 Background of Central Bank ............................................................................................................................6
1.2 Legacy of Central Bank Independence ............................................................................................................6

2 Pros and Cons of Central Bank Independence ...................................................................... 6

2.1 Pros ..................................................................................................................................................................6
2.2 Cons .................................................................................................................................................................7

3 Reserve Bank of India and its Autonomy .............................................................................. 8

3.1 Legacy of Reserve Bank of India ......................................................................................................................8
3.2 History of RBI Autonomy .................................................................................................................................9

4 RBI Vs Indian Government ................................................................................................. 10

4.1 List of Cases ...................................................................................................................................................10

5 Recent Resignations of RBI Governors – RBI Autonomy to continue or not !!! .................... 10
5.1 Debate between RBI and Indian Government ...............................................................................................10
5.2 High Profile Resignations of RBI Governors – an insight ...............................................................................10
5.3 RBI Autonomy to continue or not!!!! ............................................................................................................10

6 Analysts views on RBI Autonomy ....................................................................................... 10

6.1 International Monetary Fund ........................................................................................................................10
6.2 Magazines – Economists, Business line .........................................................................................................10
6.3 Retired RBI Governors ...................................................................................................................................11

7 Conclusion ........................................................................................................................ 11

Group # 7, EGMP 49, IIM Bangalore Page 4 of 12

Central Bank Independence
– Special reference to RBI Autonomy, India

Appendices
A References
B Acknowledgements

Figure 1: Chart 1 (above picture is just a sample) 6

Figure 2: Chart 2 (above picture is just a sample)

Error! Bookmark not defined.

Group # 7, EGMP 49, IIM Bangalore Page 5 of 12

Central Bank Independence
– Special reference to RBI Autonomy, India

1 Legacy of Central Bank and its Independence

1.1 Background of Central Bank
 Point 1

 Point 2

 Point 3

Figure 1: Chart 1 (above picture is just a sample)

1.2 Legacy of Central Bank Independence

 Point 1

 Point 2

XXX1 XXX1 XXX1

XXX
YYY YYY YYY YYY YYY YYY

2 Pros and Cons of Central Bank Independence

2.1 Pros
XXXX

YYY

Group # 7, EGMP 49, IIM Bangalore Page 6 of 12

Central Bank Independence
– Special reference to RBI Autonomy, India

 Point 1

 Point 2

 Point 3

2.2 Cons
XXXX

YYY

 Point 1

 Point 2

 Point 3

Group # 7, EGMP 49, IIM Bangalore Page 7 of 12

Central Bank Independence
– Special reference to RBI Autonomy, India

3 Reserve Bank of India and its Autonomy

3.1 Legacy of Reserve Bank of India
Reserve Bank of India is an Independent body and performs various tasks to run Indian Economy,RBI controls
monetary policy, maintains the forex, represent in India in various international forums such as world bank
participate in several nation building policies create and implement policy or committee report for better
economy and work for upliftment and financial inclusion

RBI is an apex banking institution of the country and plays an important role in regulating the banking system, its
responsible for laying out the monetary policy which has long term implication as opposed to fiscal policy which
may be directed towards short term but sustainable gains, it also issues currency notes and in absence of
autonomy , government may resort to strategy of monetized deficit, as its being the only agency representing
banks through issue of license setting KYC norms prudential norms etc. With lack of autonomy strict supervision
may be diluted.

Autonomy of RBI lies in free functioning of its respective operation sphere ,hence any allegation on RBI autonomy
seems to be biased opinion , there are 3 major function of RBI

Functions of RBI

Inflation and Monetary Policy regulation

Setting of inflation target is responsibility of elected representatives ,as they are accountable people to achieve
the complete operation of autonomy of RBI under monetary policy. In order to meet this Government and RBI
both have to take decision ,thus setting up a monetary policy committee is right step not and not any intrusion in
autonomy of RBI

Debt Management

RBI is debt manager of government , thus indirectly have a control over the public investment and prevent
crowding out of private investment ,there is a conflict of interest in debt management function and deciding
interest rates under monetary policy , hence setting up of separate Debt Management agency will not deprive
RBI’s autonomy.

Banking Regulation

The Public sector banks are under RBI regulation ,there is no direct evidence of government interference, there
are major concerns for rise in NPAs of PSBs, and Capitalisation

Group # 7, EGMP 49, IIM Bangalore Page 8 of 12

Central Bank Independence
– Special reference to RBI Autonomy, India

3.2 History of RBI Autonomy

As per RBI Act, the Central Government may from time to time give such directions to the Bank as it may, after
consultation with the Governor of the Bank, consider necessary in the public interest the reason behind this
clause is so that any major decisions are made by the government which is elected and hence accountable to the
people. The decision to demonetise high-denomination currency was taken by the government in public interest
after consultation with the RBI. The RBI board simply performed its duty by implementing the decision. The
separation of debt management from the RBI is not an assault on the RBI’s independence by the government.
Instead, it is to remove the conflict of interest that exists in the RBI’s functions of setting interest rates, and
management of the government’s debt. There has not been any assault on the RBI’s autonomy — in the setting
of interest rates or in the regulation of banks or in other operational spheres. As government is the owner of
PSBs, government's interference is justified in case of disbursal of loans from PSBs. Consultations between the
government and the RBI are undertaken on various matters of public importance wherever such consultation is
mandated by law or has evolved as a practice. Recent demonetisation policy of government has attracted the
attention over the concerns of RBI Autonomy, As per RBI Act , section 7 government can give such direction in
public interest after due consultation with RBI governor and central board. Therefore it legally appears true that
autonomy of RBI is not been compromise but the consultation remains un debated as recommended from board ,
were government and institution has to work together without interfering in each other’s space for healthy
democracy.

The autonomy for the Central Bank, within the framework of the Reserve Bank of India (RBI) Act, is an essential
and accepted governance requirement. A press release was issued by the Government on 31.10.2018 as below:
The autonomy for the Central Bank, within the framework of the RBI Act, is an essential and accepted governance
requirement. Governments in India have nurtured and respected this. Both the Government and the Central
Bank, in their functioning, have to be guided by public interest and the requirements of the Indian economy. For
the purpose, extensive consultation son several issues take place between the Government and the RBI from
time to time. This is equally true of all other regulators. Government of India has never made public the subject
matter of those consultations. Only the final decisions taken are communicated. The Government, through these
consultations, places its assessment on issues and suggests possible solutions. The Government will continue to
do so.The Government asked RBI for a review of its Economic Capital Framework (ECF) adopted in 2016. As per
press release by RBI on 19.11.2018, the Board has decided to constitute an Expert Committee to examine the
ECF, the membership and terms of reference of which will be jointly determinedly the Government and RBI and
that RBI should consider a scheme for restructuring of stressed standard assets of MSME borrowers with
aggregate credit facilities of up to Rs. 25 crore, subject to conditions for ensuring financial stability.

The details of RBI surplus transferred to the Government during the last five years are as follows:

Surplus transferred to Government (in crore

Financial year of RBI
Rupees)

2013-14 52,679

2014-15 65,896 Source : A press release was

issued by the Government on
2015-16 65,876
31.10.2018
2016-17 30,659

2017-18 50,000

Group # 7, EGMP 49, IIM Bangalore Page 9 of 12

Central Bank Independence
– Special reference to RBI Autonomy, India

4 RBI Vs Indian Government

4.1 List of Cases

 Point 1

 Point 2

 Point 3

 Point 4

5 Recent Resignations of RBI Governors – RBI Autonomy to continue or not !!!

5.1 Debate between RBI and Indian Government
 Point 1

 Point 2

 Point 3

 Point 4

5.2 High Profile Resignations of RBI Governors – an insight

 Point 1

 Point 2

 Point 3

 Point 4

5.3 RBI Autonomy to continue or not!!!!

 Point 1

 Point 2

 Point 3

 Point 4

6 Analysts views on RBI Autonomy

6.1 International Monetary Fund
 Point 1

 Point 2

 Point 3

6.2 Magazines – Economists, Business line

Group # 7, EGMP 49, IIM Bangalore Page 10 of 12
Central Bank Independence
– Special reference to RBI Autonomy, India

 Point 1

 Point 2

 Point 3

6.3 Retired RBI Governors

 Point 1

 Point 2

 Point 3

7 Conclusion
 Point 1

 Point 2

 Point 3

Group # 7, EGMP 49, IIM Bangalore Page 11 of 12

Central Bank Independence
– Special reference to RBI Autonomy, India

Appendices

A References

B Acknowledgements

Group # 7, EGMP 49, IIM Bangalore Page 12 of 12