RBI accountable to the government?

According to a former central bank chief, the Reserve Bank of India is accountable to the government and should make policies within the framework set up the government.

Background

The Reserve Bank of India (RBI) is India's central banking institution, which controls the monetary policy of the Indian rupee. It commenced its operations on 1 April 1935 under the Reserve Bank of India Act, 1934. Following India's independence in 1947, the RBI was nationalised on 1 January 1949. The RBI plays an integral part in the Development Strategy of the Government of India. It is a member bank of the Asian Clearing Union.

The central bank was an independent apex monetary authority which regulates banks and provides critical financial services like storing foreign exchange reserves, control of inflation, monetary policy report till August 2016.

Analysis

A former central bank chief, Bimal Jalan who is now the head of the panel tasked with framing guidelines for the transfer of the RBI’s surplus funds to the government said that the RBI is accountable to the government. He also said that the RBI must generate policies that are within the framework of the government.

Mr Jalan was the RBI's governor from 1997 to 2003. Speaking to Reuters news agency, he declined to comment on his committee’s recommendations, but he set out his view on the relationship between the government and the central bank. He said: “The RBI is accountable to the government for executing the kind of monetary policy that has been announced.”

The RBI and the government faced clashes over policy issues that led to Urjit Patel resigning as governor on December 10th. He was then swiftly replaced by a former foreign ministry official, Shaktikata Das.

“Now we have a new RBI governor who is from the government,” Jalan said. He added, “I hope the RBI will work well under his leadership. Differences in views are fine, but these have to be resolved internally in the country’s interest.”

Assessment

Our assessment is that these actions reflect the government’s efforts to secure tighter control over the Reserve Bank of India. We believe that there is a thin line between the laws the central bank is governed by and its autonomy.