RBI Autonomy: Is the Government out to Impound its Autonomous Status?

Reserve Bank of India (RBI) is the central bank of India. It’s an

autonomous institution and regulatory authority of banking system in India. It
was established by Reserve Bank of India Act. 1934. Royal Commission on
Indian Currency & Finance suggested establishment of RBI. It controls the
monetary policy concerning Indian rupee. RBI serves basic functions for
example, issuance of currency, to sustain monetary stability in India, to operate
the currency, and maintain the country’s credit system. The core objectives of
the RBI are to maintain the public confidence in the banking system, to protect
the interests of the depositors, and offer banking services like cooperative
banking & commercial banking to the people. RBI is an institution of national
importance. It is pillar of the Indian economy.

Recent actions by the government regarding RBI makes us to think that

government is slowly transgressing into its domain by entering in domain of
determining policy rates and other monetary policies by appointing 3 members
to the Monetary Policy Committee and thus it seems like government is out to
impound its autonomous status. There are already several issues between RBI
and government. Main issues are like easing the lending norms for MSMEs.
Issue of independent Payments Regulatory Board. Issue of classification of
NPAs. There is also issue of annual dividend payable to the government by
RBI.

The RBI is independent of the government as it takes its own decisions.

However, there are certain instances where it has to listen to the government.
Section 7 of RBI Act. empowers the government to issue directions to RBI in
public interest. Recently government put the statement that the RBI is
autonomous institution but within the framework of the RBI Act 1934. It makes
clear that RBI can’t claim absolute independence. It is autonomous within the
limits set by the government and its extent depends on the context and the
subject. In a democracy, it is impossible to have a public institution which is
autonomous but not answerable to the people. Experts point out that such an
institution will impose its preferences on economy against the latter’s will, which
is undemocratic. It is autonomous and accountable to the people ultimately by
including government in its decision making.

But overall impression is that government is trying to reform the whole

banking system by introducing several key measures like amendment in RBI
Act. itself for introducing Monetary Policy Committee and other measures. And
it’s natural to feel that government is impounding RBI’s autonomous status
when so many reforms are being taking place.