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Friday, September 27, 2013

RBI reform and the triad of independence, accountability and transparency


Some people say that the draft Indian Financial Code envisages reducing the independence of the RBI. This could not be further from the truth because at present, the RBI has no independence. This is easy to tell by reading the RBI Act. Here is the relevant extract:
7. Management.

(1) The Central Government may from time to time give such directions to the Bank as it may, after consultation with the Governor of the Bank, consider necessary in the public interest.

(2) Subject to any such directions, the general superintendence and direction of the affairs and business of the Bank shall be entrusted to a Central Board of Directors which may exercise all powers and do all acts and things which
may be exercised or done by the Bank.
Note that the directions from the Central Government are not even reported into the public domain. Directions can be threatened or given in secret. There is no limitation to the subject on which directions can be given. The government can give a direction to RBI that air conditioners must be switched off, claiming that this is `in the public interest'.

How does RBI fare on independence in an international comparison? In a recent paper, Central Bank Transparency and Independence : Updates and New Measures by Dincer and Eichengreen, RBI appears at the bottom of the list of the world's central banks on independence. Not only are we bad in absolute terms (as shown in the extract from the RBI Act above), we are bad in relative terms, when compared with other central banks of the world.

The Indian Financial Code does enormous new work to establish the notions of independence at numerous levels. Along with this, of course, go an array of accountability mechanisms. There are deep connections between the three themes of accountability, transparency and independence. It is not possible for a central bank to break any of the three legs of this stool. This is a big step away from the old RBI ethos of no accountability, low transparency and no independence.


It is well known that RBI fares poorly in international comparisons of transparency. The working paper above gives updated data on this and there is no progress to report in the last five years.

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