An arm of government

Jaya Raj The handling of demonetisation and replacement of high value notes (of ₹ 500 and ₹ 1000 denomination) by government and the Reserve Bank of India (RBI) did provoke a big debate on the autonomy and independence of the nation's central bank.

Y.V. Reddy Apart from political opponents, some prominent RBI ex-bigwigs openly came out against the currency replacement exercise by terming it as devaluation of the central bank's independence and autonomy in deciding currency and monitory issues. Many of such reactions turn out to be opportunistic, but got credence by the government's frequent flip flops and goal post shifting on demonetisation.

Bimal Jalan Mr Y.V. Reddy, RBI governor from September 2003 to 2008, said the central bank's inept handling of the issue "damaged its own institutional identity by truncating its responsibilities and diluting its appointment process." He compared the RBI with an institution like the army, as "the financial and monetary security of the country rests with the RBI" and RBI's "reputational risk" is now a national problem even affecting its international credibility

P. Chidambaram Reddy's predecessor Bimal Jalan cried that the RBI's autonomy was under threat. Usha Thorat, a former RBI deputy governor with Reddy bemoaned, "It is indeed a sad day to see one of the most respected public institutions in India becoming an object of ridicule and scorn."
Former Finance Minster Palaniappan Chidambaram who tormented Y.V. Reddy and Usha Thorat on to unsuccessfully toeing the then government line on interest rate slashing has now become a big defender of RBI's independence. He said RBI has fallen victim to 'institutional capture' by the current regime and 'years of nurturing the autonomy of the RBI' has gone to waste. Chidambaram said the (present) government seems to be telling RBI, "I will walk and you will follow" and "RBI is either speechless or stunned into silence."

It is well known that the RBI is not constitutionally independent. There is no legal act mandating autonomy of the RBI as the 1934 Act governing its operation gives the government power to direct it.

The RBI's autonomy was dormant till India embarked on its economic reforms and liberalisation course beginning 1991. The idea of RBI's autonomy in functioning was an offshoot of India's globalisation efforts that began that year.

The government appoints the central bank governor and four deputies. "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 Act says. 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.

In the present context, the Narendra Modi government after winning a massive mandate sets out on a series of reforms aimed at overall economic growth and development. The fight against corruption and black money is one among them. And if the government headed by a strong willed Prime Minister thought it right to replace high denomination notes, there is nothing illegal about it. There is very little that the RBI or its governor could have done about it except precipitating a public match in dirty linen washing.

The central bank 'autonomy' itself is a little vague. The word

In India, the finance ministry and the RBI generally try and find common ground on issues concerning monetary policy. The clash between the Treasury and central bank to a large extent depends on the personalities at the helm. Y.V. Reddy and Raghram Rajan being personalities with strong will, to an extent, could stand up to strong willed politicians like Chidmbaram or Arun Jaitley.

does not have a settled definition in law or political science. Basically, it denotes to having some type of self rule, but as part of a larger country or entity. Where as 'independence' is an objective term, referring to sovereign statehood. Basically, independence denotes to having a separate existence and it is not applicable in the current debate.

Raghuram Rajan and D. Subbaro RBI's autonomy was dormant till India embarked on its economic reforms and liberalisation course beginning 1991. The idea of RBI's autonomy in functioning was an offshoot of India's globalisation efforts that began that year.
Globally the concept of 'central bank' emerged in the 17th century along with the founding of the Swedish Riksbank in 1668 as a joint stock bank chartered to lend the government funds and to act as a clearing house for commerce. These early central banks helped fund the government's debt. They were also private entities that engaged in banking activities, holding the deposits of other banks, and hence they came to serve as banks for bankers.

Donald Trump and Janet Yelen With the Wold War I, the concept of central bank got enlarged to gradually include new responsibilities like maintaining the domestic economy's stability, employment generation and holding of domestic price level. Autonomy in functioning became necessary to check the treasuries' unhindered paper financing resorted to in the war years. The shift also reflected a change in the political economy of Europe of that time.

Theresa May and Mark Carney In India, RBI and the government have clashed over monetary policy in the past, notably during the tenure of Governor Y.V. Reddy. then-finance minister Chidambaram pressured the RBI to abandon the hawkish stance against inflation and interest rates to help sustain high growth and bring relief to borrowers. Reddy was prodded by

Shinzo Abe and Masaaki Shirakawa the finance ministry to raise rates against his wishes, as he later revealed in an interview after he left office. However, he acknowledges that "These (differences) are due to the clash of political interests of the government, which will have a five-year view, and the RBI, which will have a long-term view for economic stability."
Similar clash of interests had occurred during the tenure of governors D. Subbaro and Raghuram Rajan. It is well known

Arun Jaitley that Finance Minister Arun Jailtley and the Modi government wanted RBI to abandon the rigid inflation fighting stance and lower interest rates to prop up production and economy while readying for the 2005 union budget. But governor Rajan went public opposing any move to prop up growth without addressing the inflation and set fiscal deficit targets. That in a way culminated in Rajan not being given an extension after his initial three-year term.
In most economies aspiring further growth, there is tension between the finance wing of the government and the central bank. The most recent examples are the ongoing clash of interest between US President Donald Trump and Fed Reserve chief Janet Yelen; British Prime Minster Theresa May and Bank of England governor Mark Carney; and Japanese Prime Minister Shinzo Abe and BoJ governor Masaaki Shirakawa.
In India, the finance ministry and the RBI generally try and find common ground on issues concerning monetary policy. The clash between the Treasury and central bank to a large extent depends on the personalities at the helm. Y.V. Reddy and Raghram Rajan being personalities with strong will, to an extent could stand up to strong willed politicians like Chidmbaram or Arun Jaitley. But one cannot expect such stance from mild mannered personalities like D. Subbaro or the present RBI governor Urjit Patel.
Even Raghuram Rajan, who is an outspoken personality, chose to speak on the central bank's independence only in his last public speech in the capacity of the RBI governor. Rajan said the RBI cannot merely exist if the institution's ability to say "No!" is not protected, even though it still has to work under a framework set by the Government. Rajan also wanted the RBI governor to be treated as the most important technocrat in charge of economic policy to balance the importance of that role.
To sum up, the central bank in India is an arm of the government. It has its responsibility to the government and commitment to the people. Differences are inevitable in policy and implementation issues. The nation's interests are best served if the government and central bank could move forward in rapport.
In this context, the Finance Ministry's statement on January 14 that "the government fully respects the independence and autonomy of the Reserve Bank of India" is most heartening.



		EDITOR'S MAIL MATTERS OF PUBLIC POLICY FIVE-STATE POLL PUNJAB ELECTION ON RECORD FRANKLY SPEAKING REALPOLITIK CHANGING POLITICAL PROFILES THE NIGHT THAT WAS RBI AUTONOMY A DIVIDED PARTY DIDI'S POLITICS INDIA ESSAY VOICE FROM LONDON 45TH U.S. PRESIDENT HITS & MISSES MIXED BLESSING ENVIRONMENTAL NEGLECT BOOK BAZAAR BOOK BAZAAR BOOK BAZAAR YOGA IN DAILY LIFE-X SIGNS OF THE TIMES INTERVIEW BOLLYWOOD PANORAMA TRIBUTE THAT HEROIC EVENT LIVING WITH NATURE ART OF LIVING Issue:February' 2017 Subscribe Now	RBI AUTONOMY An arm of government Jaya Raj The handling of demonetisation and replacement of high value notes (of ₹ 500 and ₹ 1000 denomination) by government and the Reserve Bank of India (RBI) did provoke a big debate on the autonomy and independence of the nation's central bank. Y.V. Reddy Apart from political opponents, some prominent RBI ex-bigwigs openly came out against the currency replacement exercise by terming it as devaluation of the central bank's independence and autonomy in deciding currency and monitory issues. Many of such reactions turn out to be opportunistic, but got credence by the government's frequent flip flops and goal post shifting on demonetisation. Bimal Jalan Mr Y.V. Reddy, RBI governor from September 2003 to 2008, said the central bank's inept handling of the issue "damaged its own institutional identity by truncating its responsibilities and diluting its appointment process." He compared the RBI with an institution like the army, as "the financial and monetary security of the country rests with the RBI" and RBI's "reputational risk" is now a national problem even affecting its international credibility P. Chidambaram Reddy's predecessor Bimal Jalan cried that the RBI's autonomy was under threat. Usha Thorat, a former RBI deputy governor with Reddy bemoaned, "It is indeed a sad day to see one of the most respected public institutions in India becoming an object of ridicule and scorn." Former Finance Minster Palaniappan Chidambaram who tormented Y.V. Reddy and Usha Thorat on to unsuccessfully toeing the then government line on interest rate slashing has now become a big defender of RBI's independence. He said RBI has fallen victim to 'institutional capture' by the current regime and 'years of nurturing the autonomy of the RBI' has gone to waste. Chidambaram said the (present) government seems to be telling RBI, "I will walk and you will follow" and "RBI is either speechless or stunned into silence." It is well known that the RBI is not constitutionally independent. There is no legal act mandating autonomy of the RBI as the 1934 Act governing its operation gives the government power to direct it. The RBI's autonomy was dormant till India embarked on its economic reforms and liberalisation course beginning 1991. The idea of RBI's autonomy in functioning was an offshoot of India's globalisation efforts that began that year. The government appoints the central bank governor and four deputies. "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 Act says. 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. In the present context, the Narendra Modi government after winning a massive mandate sets out on a series of reforms aimed at overall economic growth and development. The fight against corruption and black money is one among them. And if the government headed by a strong willed Prime Minister thought it right to replace high denomination notes, there is nothing illegal about it. There is very little that the RBI or its governor could have done about it except precipitating a public match in dirty linen washing. The central bank 'autonomy' itself is a little vague. The word In India, the finance ministry and the RBI generally try and find common ground on issues concerning monetary policy. The clash between the Treasury and central bank to a large extent depends on the personalities at the helm. Y.V. Reddy and Raghram Rajan being personalities with strong will, to an extent, could stand up to strong willed politicians like Chidmbaram or Arun Jaitley. does not have a settled definition in law or political science. Basically, it denotes to having some type of self rule, but as part of a larger country or entity. Where as 'independence' is an objective term, referring to sovereign statehood. Basically, independence denotes to having a separate existence and it is not applicable in the current debate. Raghuram Rajan and D. Subbaro RBI's autonomy was dormant till India embarked on its economic reforms and liberalisation course beginning 1991. The idea of RBI's autonomy in functioning was an offshoot of India's globalisation efforts that began that year. Globally the concept of 'central bank' emerged in the 17th century along with the founding of the Swedish Riksbank in 1668 as a joint stock bank chartered to lend the government funds and to act as a clearing house for commerce. These early central banks helped fund the government's debt. They were also private entities that engaged in banking activities, holding the deposits of other banks, and hence they came to serve as banks for bankers. Donald Trump and Janet Yelen With the Wold War I, the concept of central bank got enlarged to gradually include new responsibilities like maintaining the domestic economy's stability, employment generation and holding of domestic price level. Autonomy in functioning became necessary to check the treasuries' unhindered paper financing resorted to in the war years. The shift also reflected a change in the political economy of Europe of that time. Theresa May and Mark Carney In India, RBI and the government have clashed over monetary policy in the past, notably during the tenure of Governor Y.V. Reddy. then-finance minister Chidambaram pressured the RBI to abandon the hawkish stance against inflation and interest rates to help sustain high growth and bring relief to borrowers. Reddy was prodded by Shinzo Abe and Masaaki Shirakawa the finance ministry to raise rates against his wishes, as he later revealed in an interview after he left office. However, he acknowledges that "These (differences) are due to the clash of political interests of the government, which will have a five-year view, and the RBI, which will have a long-term view for economic stability." Similar clash of interests had occurred during the tenure of governors D. Subbaro and Raghuram Rajan. It is well known Arun Jaitley that Finance Minister Arun Jailtley and the Modi government wanted RBI to abandon the rigid inflation fighting stance and lower interest rates to prop up production and economy while readying for the 2005 union budget. But governor Rajan went public opposing any move to prop up growth without addressing the inflation and set fiscal deficit targets. That in a way culminated in Rajan not being given an extension after his initial three-year term. In most economies aspiring further growth, there is tension between the finance wing of the government and the central bank. The most recent examples are the ongoing clash of interest between US President Donald Trump and Fed Reserve chief Janet Yelen; British Prime Minster Theresa May and Bank of England governor Mark Carney; and Japanese Prime Minister Shinzo Abe and BoJ governor Masaaki Shirakawa. In India, the finance ministry and the RBI generally try and find common ground on issues concerning monetary policy. The clash between the Treasury and central bank to a large extent depends on the personalities at the helm. Y.V. Reddy and Raghram Rajan being personalities with strong will, to an extent could stand up to strong willed politicians like Chidmbaram or Arun Jaitley. But one cannot expect such stance from mild mannered personalities like D. Subbaro or the present RBI governor Urjit Patel. Even Raghuram Rajan, who is an outspoken personality, chose to speak on the central bank's independence only in his last public speech in the capacity of the RBI governor. Rajan said the RBI cannot merely exist if the institution's ability to say "No!" is not protected, even though it still has to work under a framework set by the Government. Rajan also wanted the RBI governor to be treated as the most important technocrat in charge of economic policy to balance the importance of that role. To sum up, the central bank in India is an arm of the government. It has its responsibility to the government and commitment to the people. Differences are inevitable in policy and implementation issues. The nation's interests are best served if the government and central bank could move forward in rapport. In this context, the Finance Ministry's statement on January 14 that "the government fully respects the independence and autonomy of the Reserve Bank of India" is most heartening.