What do we mean by the autonomy of RBI?

economy : What-do-we-mean-by-the-autonomy-of-RBI

Answer by Anand Vardhan:

What law says ?

  • The RBI is not constitutionally independent, as the 1934 Act governing its operation gives the government power to direct it. The government appoints the central bank governor and four deputies.
  • Technically, the government is also permitted by the Act to supersede the central bank if it believes the RBI has failed to carry out its obligations.
  • So RBI 's autonomy is not sanctioned by any statute. 

Present Status

  • The RBI over the years enjoyed the autonomy because of its track record of performance and successive governments found it sensible to confer a large degree of autonomy on the RBI.
  • Governors of RBI have understood that they can exercise more autonomy by having political authority on board in its decisions.
  • Autonomy is dependent on the close understanding between goi & rbi.

Autonomy

  • Central bank independence generally relates to three areas viz. personnel matters; financial aspects; and conduct of policy.
  • Personnel independence refers to the extent to which the Government distances itself from appointment, term of office and dismissal procedures of top central bank officials and the governing board.
  • Financial independence relates to the freedom of the central bank to decide the extent to which Government expenditure is either directly or indirectly financed via central bank credits. Direct or automatic access of Govt to central bank credits would naturally imply that monetary policy is subordinated to fiscal policy. 
  • Policy independence is related to the flexibility given to the central bank in the formulation and execution of monetary policy.

Dangers to Autonomy

  • The government wants to put in place a formal mechanism that will circumscribe the RBI’s role in monetary policy.
  • RBIs single point agenda of inflation targeting runs contrary to government's view to have growth as an important factor.
  • GOI has recently expressed to set inflation targets for RBI.
  • The RBI has kept the repo rate unchanged at 8 % since January 2014.Not lowering interest rates risks derailing the incipient recovery in the Indian economy. We need a revival in investment to ensure an early return to a growth rate of over 7
  • The RBI Governor has argued that a cut in interest rates will not make much of a difference to investment because it does not reduce the cost of funds significantly. This is true but an interest rate cut could still provide a stimulus to the economy.

Conclusion

  • In an economy such as ours, it is entirely legitimate for the political authority to set inflation target.

What do we mean by the autonomy of RBI?

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