The Reserve Bank of India Act was enacted on March 6, 1934, but became operational from April 1, 1935. In the last 80 years, there have been some amendments to the Act, but the preamble has remained intact. Now, for perhaps the first time in its history, significant changes in the Act may become a subject of discussion.

In the preamble, the term ‘monetary stability’ remains open to debate and interpretation. Does it mean price stability, exchange rate stability and a stable payments system in equal measure?

Of late, though, price stability is being given more importance than exchange rate stability or payment system stability.

Price stability, it is argued, is critical for growth and can be quantified and achieved in India -- but only if the RBI is freed of the overbearing influence of the Central government.

This is the crux of it all. Those in favour of greater central bank autonomy argue that the current system of monetary policymaking in India is unsatisfactory because it is done in consultation with the Ministry of Finance.

They also argue that even though the governor and the deputy governors are appointees of the government and are not directly accountable to the public at large, the bank could give periodic inflation reports — a practice in many advanced countries, which could satisfy the accountability criterion to some extent.

Moreover, the governor’s accountability is said to be evident from his depositions before the Parliament committees on banking and finance.

The Urjit view It is therefore argued that monetary policymaking should be independent of government dominance and conducted through a committee of outside experts and select members of the management of the RBI for the sake of credibility. This is how the Urjit Patel committee report on monetary policy framework views the current situation. In its view, the government need not be represented on the monetary policy committee (MPC). The committee may not be required to consult the government on policy objectives.

However, explicit legal provisions are required for this proposal to take shape.

This would need to cover areas such as (a) the relationship between the proposed MPC and the board of directors of the RBI; (b) the relationship between the proposed MPC and provisions of the laws and regulations on commercial banks and other financial institutions; and (c) the institutional mechanisms required to ensure that policy decisions are strictly ‘monetary’ in character and do not impinge on the authority of other organisations.

Besides, the rules may have to spell out accountability of outside experts and transparency practices.

The public should also know the grounds for imposing sanctions on the MPC for not realising its objectives. In other words, sanctions would be operated upon only when the given ‘escape clauses’ are exhausted.

The escape clauses are meant only to allow for a reasonable degree of flexibility in meeting the targets, allowing for exogenous circumstances that are beyond the control of the Bank. In the absence of these clauses, the MPC’s autonomy would come under threat. Would this change be possible without a large number of amendments to the RBI Act? If it is easy to make amendments to the Act, why did the RBI go in for a technical advisory committee on monetary policy in 2006 when the Indian economy was performing exceptionally well in terms of growth and inflation?

A practical question to ask, therefore, is the following: Will the current Indian polity agree to so many amendments to the Act?

Or, to put it differently, should we pass a fresh RBI Act to replace the existing one, as some African countries have done?

It is a tough question at this point in time.

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