In a recent comment made by Finance Ministry, it said India’s central bank, Reserve Bank of India is totally autonomous and its freedom is respected by the government. Following the demonetisation move by the Indian government and its subsequent narratives, several questions were raised regarding the autonomy of the RBI. The questions ranged from how the decision was taken and why there was such a poor implementation of the rule, but what overshadowed all debates was why there were so many policy changes made by the RBI? The questions on the freedom of the RBI went to such an extent that even former RBI governors Y.V Reddy and Bimal Jalan raised their voices on the issue.
The debate on the autonomy will continue, while it can be safe to say that RBI’s reputation is at stake right now because a lot of people believe that the bank blindly followed government orders and approved of the demonetisation move. According to Y V Reddy, it is now an internationally important issue than just a nationally relevant political issue. This is an important issue as the stability of the Indian economy is at stake and so is the credibility of the bank and not only in front of global investors but also from the point of view of the organisations that the RBI regulates. RBI governor Urjit Patel has been under the scanner as speculations are rife that he is just following orders and have no stand on his own. This may or may not be a far-fetched rumour, but his disquieting silence and muddled silence is not helping his cause too. Even former deputy governor Usha Thorat in her article in IE wrote that RBI which is one of the most respected institutions is now an object of ridicule.
Interestingly, the world order is no different. In many countries all over the world, one can witness a trend, in which there is a tussle between the government and central bank, and where the latter is becoming weaker by the day. After the 2008 economic recession, there has been an increasing trend in bad blood between governments and central banks. India, however, stayed away from both recession and the tussle. This is mainly because, individualism has always been respected in India when it came to RBI and economic policies. From Dr. Manmohan Singh to Raghuram Rajan, they were known to take their stand on which policies they believed in and took their own decisions.
If we start with US President-elect Donald Trump, who has been vocal against Janet Yellen, Federal Reserve chief, and said that she shall be removed. Whether he follows up on that, remains to be seen once he starts his office.
In Israel, there were rumours about tensions between PM Benjamin Netanyahu and Stanley Fischer, the Bank of Israel governor. Fischer later resigned. Interestingly, he had made a famous speech on November 4, 2015, on the independence of the central bank.
Even in the United Kingdom, post the Brexit referendum, newly elected Prime Minister had hit out against Mark Carney, Bank of England’s governor due to low-interest rates. This was followed by slamming from Conservative party members William Hague and Michael Gove. This has resulted in a fear that Carney might resign soon.
Also watch:
[jwplayer 5qdAzsG3-DE6UeepY]
In Hungary, President Viktor Orban, head of Fidesz, a right-wing party, managed to throw out the country’s central bank governor and replaced him with a person who has since been mired in corruption allegations. Even in Sri Lanka, there has been an increased clash between Ravi Karunanayake, the finance minister and Indrajit Coomaraswamy, the central bank governor.
The trend was seen in Japan too when Prime Minister Shinzo Abe took over and asked the Bank of Japan to mint out more currencies and increase the inflation, which essentially meant major changes in monetary policies. Though Abe went on with the hope that this will take the country out of a long-standing deflation, but Masaaki Shirakawa, the BoJ governor was against the decision and resigned.
According to Section 26(2) and Section 7 of the Reserve Bank of India Act, 1934, it is true that the RBI does not have complete autonomy, rather a relative freedom, yet one should remember that RBI is responsible for monetary policy as well as regulating banks and that has been reiterated by experts all over the world. But in some way or the other, there have been attempts made by regimes to eat into these responsibilities. Even in the case of demonetisation, it is hard to see why the RBI did not pose any dissent regarding the move, especially because of the logistical problems if not anything else. While the whole country has been debating and discussing the issues related to to demonetisation move, it will not be too stretched to ask why the RBI did not question the government all throughout. While earlier RBI may have won or lost in its fight against government policies, and the recent move may go on to be the best economic decision ever, yet the question remains relevant, added to whether it supported the demonetisation move or did it succumbs to it. Because, freedom’s appearance is equally relevant as freedom itself, but is India following the world order too?
