The RBI appears to be independent within a boundary set by the government but the problem is that the boundary is not defined or recognisable and, worse, it seems to shift from time to time,
A lot has been written about the effectiveness of the central bank in providing policy signals from time to time and steering market expectations on interest rates. The effectiveness of monetary policy would depend on the transparency of its process. Transparency, in turn, hinges on the degree of independence enjoyed by the central bank. Where does the Reserve Bank of India stand in this respect?
The RBI is certainly not independent in a de jure sense because the government enjoys overriding powers in the statute: It can remove the head of the institution without assigning any reason, it can supersede the governing board, and it can issue directions on policy matters. But, de facto, the RBI claims a lot more independence in operating monetary policy and choosing the timing and extent of applying its tools.
Since it is legally subordinated to the government, the RBI can obviously enjoy independence only to the extent that Government chooses to allow it, implicitly or explicitly.
The central bank, therefore, seems to be independent within a boundary set by the government; but the problem is that there is no defined or recognisable boundary and, worse, it seems to shift from time to time.
The Government appears to allow more operational space to the RBI during the easing phase of monetary policy; conversely, it seems to corner it from several directions, constraining it from timely interventions during the tightening phase.
There is no way to discern whether the government issues directions to the... [continues]
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