Central Bank (RBI) and Central Government Tussle: Independence of RBI

Central Bank (RBI) and Central Government Tussle: Independence of RBI

Introduction:- The Reserve Bank of India and The Government Of India have arised the dispute over its Independency and power. Both have given the picture that they are not on the same surface even having an understanding of their role is concerned. The RBI raised the issue over its independency, that is being violated while the government rationalizes its intervention about the concern of economy of the country.

What is the Fight about?

The Power Tussle:-

                                Reserve Bank of India says that they have “inadequate control over PSBs, including no power to remove the chairmen, directors or CEOs of state owned banks.

Government of India is Ministry of Finance has listed in parliament the power RBI enjoys under the Banking Regulation Act. The ministry says the powers are wide ranging an comprehensive to deal with various situations.

Bad Loan:-          

                The Reserve Bank of India, in February 2018 circular did away with trade restructuring schemes and put in a default rule under which banks must treat a company as a defaulter even if it misses repayment by a single day.

The Government is opposed the rule, arguing it could render many companies as defaulters and hurt entrepreneurship. The government could also invoke an unused provision in the RBI Act to dilute the circular for the power sector.

                Dividends The RBI paid the government a dividend of Rs 30, 659 crore in FY 2016-17 less than half of what it did in FY2015-16. The government wants the RBI to consider framing a policy that will mandate it to transfer a certain percentage of the dividend to the government.

Autonomy defined by Central bank of the Government:-

The Idea of independence of the Central Bank started to rise approximately 20 years ago. This was understood for functional independence functional Independence means the bank would be remain unconstrained by the government means the government would not be made limit over the independence of RBI however the autonomy of RBI was not extended to Goal Independence means what the goals of the RBI should be chosen by the Central Government without reference to the Central Bank.

  • The focused issue was whether the bank should focus on inflation alone or also on the employment

Level within 10 years of the debate it had been acknowledged that the focused would be on the former and monetary policy came to be recognized with targeting of inflation.

Where RBI exist in Autonomy:-

As the paper published in the international journal of central banking in 2014-RBI was ranked/existed as the least Independent among 89 Central Banks.

  • This ranking (Least Independent) can be improved because of adoption of Inflation Targeting in Feb 2015 and also due to formation of Monetary policy Committee (MPC) in October, 2016.
  • As the recommendation made by Financial Sector Legislative Reforms Commission. Commission formed in the regime of UPA government was to cut down the powers of RBI.
  • In 2013 Financial Stability Development Council (FSDC), a financial sector monitoring body established and was to be chaired by Finance Minister.
  • RBI Act, 1934 does not empower RBI absolute Autonomy however RBI has some independency about the regulatory and monetary function.
  • Monetary functions and rates decided by only RBI, the Quantitative measures decided by RBI alone.

What is RBI Concerned:-

  1. Reserve Bank of India wants more power to regulate the Public sector Bank (PSB).
  2. The Government should not make its rights over the Reserve Capital Surplus.
  • According to Governor Urjit Patel told in Parliamentary Panel that RBI does not have enough powers over PSB’s but RBI have its nominee directors in Bank Board.
  • It also leads the inspection at banks and financial auditing also has organized the plan of merger between banks whenever the bank would be on the verge of collapse. So inspite of having adequate control over public sector Banks but cannot exercising it.

Way forward:-

                                Government is concerning about the Micro Small Medium Enterprises (MSMEs) which are facing the difficult economic situation after the Demonetization and is also concerning over the Public Sector Banks which are included in the Prompt Corrective Action (PCA) Framework putting these issues in the mind the government would be given the interest rate subvention.

As the NPAs has been liked due to giving loan and difficulties of PSBs raised the government wants to being the economic train on the track.


                  These should be democratic model and structure in the economic institution where RBI will be obligated to explain and defence its position.

  • Other countries in the world have its healthy routes and strong model of structure and each model is appropriately turned to their specific context.
  • We need a strong and healthy structured forum to established balance between unrestrained economy and political intervention.