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Enhancing RBI’s autonomy

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October 16, 2017

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

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