Independence of the Central Bank

In a democracy, there are institutional arrangements in place to check potential abuse of power.

In India, one such critical constitutional power is vested with the Comptroller and Auditor General of India (called as “CAG”). There are many other positions – such as the Election Commissioner of India, the Chief Information Officer, etc., But one crucial piece is the centrality and neutrality of the Reserve Bank of India (RBI) which is the equivalent of the Federal Reserve of the U.S. or the Bank of England or the Monetary Authority of Singapore.

India has been fortunate to have a series of Governors of the RBI, who are eminent persons who had previously served the Government of India (mostly in the Ministry of Finance, or in the International Monetary Fund, or the World Bank). These Governors have upheld the independence of the RBI consistently, to the extent that the common layman of India today has more trust on the RBI Governor and the Chief Justice of India than other government folks.

We do not know what power plays are being played out in the complex economic scenarios in India at the governmental level. We can only see the final actions taken by the respective organs of the government or constitutional agencies, and the results which come out of those actions.

I was not surprised that the RBI chose not to reduce the interest rates today during their mid-quarter review of the economy. Instead, the RBI reduced the CRR (Cash Reserve Ratio), releasing some serious liquidity into the banking system. The decision conveyed categorically that the RBI will not (and should not) play to the public or government gallery and drive up the “feel good” factor, but based its decision on hard economic factors such as the increased inflation.

That is the way it should be – if the government of the day expected that the RBI will help its cause and the stock market, it was surely disappointed. While there were some noises from all sides, the stock market responded with a tempering of the market indices. That was to be expected again.

So, in conclusion, we should all be proud that the balancing entities under the constitutional set up of India, are working well, keeping the interest of the country as a whole, and not succumbing to each other’s persuasion for unwarranted benefits.


Vijay Srinivasan
16th September 2012


One thought on “Independence of the Central Bank

  1. I am really impressed with your writing skills and also with the layout on your blog. Is this a paid theme or did you customize it yourself? Either way keep up the excellent quality writing, it is rare to see a nice blog like this one nowadays

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