Events led to Demonitisation show how autonomy of RBI is being compromised

January 10, 2017, 9:38 am
Events led to Demonitisation show how  autonomy of RBI is being compromised
BUSINESS NEWS
BUSINESS NEWS
Events led to Demonitisation show how  autonomy of RBI is being compromised

Events led to Demonitisation show how autonomy of RBI is being compromised

Independence of the Central Bank has been a subject of discussion in India well before demonetisation was announced. The attack on Raghuram Rajan, former governor of the RBI by some senior BJP leaders was seen as an affront against the independent functioning of the RBI. His monetary policy, many in the finance ministry believed was not ‘growth’ friendly. But Rajan has another theory in mind and continued to give importance to deal with the issue of inflation while keeping the interest rate relatively high.

Till his term was over Rajan through his policy assertions, inadvertently fought for the independence of the Central Bank. But recent events show that the government has succeeded in ‘taming’ the central bank to the point that it acts on the basis of the directions from the union government. The latest reports show that the Reserve Bank of India, without any suggestions accepted the government’s proposal to demonetise high valued currencies. The policy flip flops of the RBI after the 8 November announcement also corroborates this fact.

The government has been maintaining that the proposal to take back the Rs 500 and Rs 1000 came from the Reserve Bank. Ministers have said on the floor of the Parliament that it was RBI’s suggestion to demonetise the currencies to counter among other things the menace of the Fake Indian Currency Notes (FICN).

In a submission to the Parliamentary panel the RBI has confirmed that demonetisation idea came from the government and the central bank was only agreeing to it.

Government, on 7 November, 2016, advised the Reserve Bank that, to mitigate the triple problems of counterfeiting, terrorist financing and black money, the Central Board of the Reserve Bank may consider withdrawal of the legal tender status of the notes in high denominations of Rs 500 and Rs 1,000
RBI to the Parliament’s Department Related Finance headed by Congress leader M Veerappa Moily.

In its advice to RBI, the government said eliminating black money will eliminate the long shadow of the ghost economy and will trigger economic growth. The government’s note to the RBI said that there has been an increased circulation of Rs 500 and Rs 1000 notes with an increased incidence of counterfeiting. The advice was given on 7 November and RBI director board met to compile a proper recommendation for the government to withdraw more than 86 percent of the currencies in circulation.

After the demonetisation was announced the RBI was seen changing the regulations to withdraw money from banks and ATMs often. This many critics said reflects the lack of preparedness on the part of the central bank. Moreover all these events show how the government is tampering with the authority of the RBI.

Recently the government has appointed a Monetary Policy Committee to fix the benchmark policy interest rate to contain inflation. This committee appointed recently takes away what all powers the RBI governor had in fixing the interest rates.

The newly constructed committee have six members, three each nominated by the government and the RBI. And the governor must accept the recommendation of the committee. Earlier the RBI governor had the power to influence the interest rates. For a central bank, dominated by the government, a tendency to tamper with the policy instruments of the monetary policy to suit the short term goals of the government would be shown.

Constitution of the Monetary Policy Committee and the events led to the demonetisation show how the autonomy of the RBI is being infringed. And this many say would have serious repercussions in the managing money