Why it is important to preserve the independence of RBI from an over-arching reach of the state. Discuss (200 words)
Refer – Live mint
Enrich the answer from other sources, if the question demands.
IAS Parliament 6 years
KEY POINTS
Importance of an independent RBI
· Functions – A central bank performs several important functions for the economy.
· The RBI
1. controls the money supply
2. sets the rate of interest on borrowing and lending money
3. manages the external sector including the exchange rate
4. supervises and regulates the financial sector, notably banks
5. often regulates credit and foreign exchange markets
6. ensures financial stability, domestic as well as on the external front
· Architecture – Its tasks being somewhat complex and technical, central banks are ideally headed and manned by technocrats or field experts.
· This architecture reflects the acceptance of the thesis that central banks should be allowed to exercise their powers independently.
· Approach – The basic difference between the approach of a government and central bank is that the former is bound by short-term political targets but the latter is not bound by such targets.
· Use of its powers of money creation and setting the cost of money for short-term benefits can be disastrous for the economy.
· Therefore, it is important that central banks have the institutional wherewithal to take independent decisions in order to be able to maintain price and financial stability.
· To protect the economy from such short-termism, it is vital for the central bank to be at a safe distance from the executive branch of the government.
· Undermining the RBI’s independence can trigger a crisis of confidence in capital markets that are tapped by governments (and others in the economy) to run their finances.
· Governments that do not respect central bank’s independence will sooner or later incur the wrath of financial markets, ignite economic fire, and come to rue the day they undermined an important regulatory institution.
· Their wiser counterparts who invest in central bank independence will enjoy lower costs of borrowing, the love of international investors, and longer life spans.
Tapasvi 6 years
Kindly review
IAS Parliament 6 years
