Enhancing RBI’s autonomy

Why in news?

Bank of England recently convened a two-day conference insisting on the need to have independent central banks.

What are the inferences from the conference?

• At many critical instances unconventional policies were undertaken by central banks.
• Delegating policymaking authority stands against the technical elites of the central banks.
• There is a compelling case to shield the central bank from political influence to accomplish price stability.
• An independent central bank with a clearly defined mandate was more capable of keeping inflation lower and stable than policymakers.
• It gives strength to the notion that such an institution is an integral part of any country’s monetary system.

What are the implications for Indian central bank?

• India’s central bank has come under pressure to substantially lower the interest rate despite its inflation projections not allowing for it.

• If the central bank continues to face such pressure, market participants will start suspecting that monetary policymakers might capitulate.
• Monetary policy can be effective only if there is a strong trust in central banks’ action, cynicism on monetary policy will gradually lose its relevance.
• Due to GST and Demonetization, role of institutional credit (over which the RBI can wield direct control) will gradually expand further.

How RBI’s autonomy can be enhanced?

• Ensuring full-operational autonomy to the RBI is one of the preconditions to achieve, and sustain macroeconomic stability.
• If the RBI seems to be giving more weight to controlling inflation than growth, this issue should be addressed through Parliamentary process.
• The Government should start the discussion with the RBI now to assess whether it is possible to expand the inflation targeting mechanism to include employment mandate.
• It is prudent for RBI to alter its framework to account for such changes in order to make its policies more effective and far-sighted.

• Concern over letting technocrats have decision-making authority is a legitimate in a democracy.
• The way to deal with this is not by influencing their functioning but by making them more accountable to their actions.

Source: Business Line