Recently Deputy Governor of Reserve Bank of India (RBI) Viral Acharya warned the government against curbing the independence of the central bank.

Background :

• Various RBI governors had earlier raised the issue of more autonomy for RBI.
• The government might invoke so far never-used Section 7 of the RBI Act 1934, in which it will issue an order to the RBI to take into account the government instructions in the public interest which might impact autonomy of RBI.

Why Independence of RBI is important?

• For implementing policies: The RBI has multiple policy objectives that serve the public interest from price stability, growth, development to financial stability that also have political consequences. The central bank has to have a clear mandate and simultaneously the necessary operational freedom to fulfil its mandate.
• Free from Political interferences: Important for the functional autonomy of RBI in order to discharge crucial roles like credit authorization policies among others
• Regulation: It is also important that RBI is statutorily limited in undertaking the full scope of actions against public sector banks (PSBs) as also in case of PNB fraud which eroded credibility of RBI.
• Separate institute: The central bank is set up as an institution separate from the government. It is not a department of the executive function of the government. Its powers are enshrined as being separate through relevant legislation.
• Ensuring Sustainable Economic Growth: Central bank autonomy fosters price and financial sector stability that are conducive to sustainable economic growth.

Why Accountability of RBI is important?

• Democracy: In a democracy, sovereignty lies with the people. And government, not the central bank, is answerable to the people. If the Reserve Bank, for instance, fails to keep inflation low, it is the government that pays the price, not RBI.
• Answerable in failures: The flip side of autonomy is accountability and the RBI should be answerable if it fails to achieve these goals. The progressive widening and deepening of the activities of the RBI in different sectors of the economy affect the lives of millions. Hence any type of failure should be answerable by RBI.
• More transparency: The central bank can also make mistakes, and is generally held publicly accountable through parliamentary scrutiny and transparency norms. This ensure more transparency in the system with clearly defined roles.
• Accountable through Government: The RBI is autonomous but within the framework of the RBI Act. Hence Central bank cannot claim absolute autonomy. It is autonomy within the limits set by the government and its extent depends on the subject and the context.

Way forward :

• Balancing autonomy and accountability: Institutional autonomy of RBI has to be respected and all institutions will have to work together to achieve the common goal.
• There has to be a forum within our democratic structure where the RBI is obligated to explain and defend its position.
• There is a need to pay due regard to both autonomy and accountability. For example - we have an inflation targeting model now and the central bank is accountable for its inflation targeting. Similarly, there can be such autonomy and accountability for financial sector regulation by creating some desirable objectives.
• Implementing recommendations of Financial Sector Legislative Reforms Commission (FSLRC): FSLRC sought to modernize governance and make regulators more independent as well as more accountable.For example, it proposed to do away with the government’s power to give directions, while it sought to make boards of regulators more accountable and transparent with agenda and minutes of board meetings to be public.
• Separation of domains: Since the goals of the government and the RBI coincide, both have to respect each other’s operational space. While economic growth is impossible without adequate credit, the RBI needs to ensure that its policies do not hamper the growth of credit and investment.
• Review of regulatory powers: If regulatory powers need a review, Parliament should make law accordingly. There should be clarity on the regulatory powers of RBI as well as Government.