The preamble of the Reserve Bank of India Act 1934 says ‘Whereas it is expedient to constitute a Reserve Bank of India to regulate the issue of bank notes and keeping of reserves with a view to securing monetary stability in India and generally to operate the currency and credit system of the country to its advantage.’ This gives an impression that the Reserve Bank has complete grip on the economy and the financial system where the Central Government, State governments, various markets, financial and other institutions and varieties of instruments and people interact and carry out transactions involving transformation of information and high technology. But, it has its own limitations and unless and until the Central Government gives full support and functional autonomy in letter and spirit, implementation of the preamble is practically rendered difficult..........
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The Preamble of the RBI Act concludes with the following statement:
“And whereas in the present disorganization of the monetary systems of the world it is not possible to determine what will be suitable as a permanent basis for the Indian monetary system;
But whereas it is expedient to make temporary provision on the basis of the existing monetary system, and to leave the question of the monetary standard best suited to India to be considered when the international monetary position has become sufficiently clear and stable to make it possible to frame permanent measures;
It is hereby enacted as follows: -”
Recent moves by government including induction of a second director on the RBI’s board betray intent to exercise the ‘ownership’ rights on the institution which would be disastrous to the country’s financial sector. The practice of selecting senior ministry officials for the top posts in regulatory bodies itself is not a healthy trend, as the individuals take some time to leave the apron strings of the ministries they belonged. Though he happened to be an exception to this, Dr Subbarao too suffered from the disadvantage of a couple of Ex-RBI Governors and some who lost in the race for the top RBI post in Delhi confronting him with their advice about how he should be managing monetary policy.
In the circumstances, as brought out in the article there is felt need to evolve some consensus on coordination between RBI and GOI and it would be prudent not to unsettle the conventions and practices evolved over time in regard to the core functions of RBI including public debt management, till such time the RBI Act is subjected to a comprehensive review, envisaged in its Preamble, quoted above. Such a review may have to wait for governance itself to ‘stabilise’ in the coalition context.
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