Submitted By :-

Niharika Singh (2) Sneha Raina (9) Aditi V.Jain (10) Animesh Hakim (17) Jeevan Rajan (20) Priyanka Chauve(24) Pranav Jain (43)

In 1926 -Hilton Young Commission recommended divisions of responsibilities for control of currency and credit should end. Bill to establish RBI was introduced in 1933 The RBI Act came into force on January 1, 1935 The RBI was inaugurated on April 1, 1935 as a shareholders institution and the Act provided for the appointment of the Governor and two Deputy Governors. RBI was nationalized on January 1, 1949 in terms of the Reserve Bank of India (Transfer to Public Ownership) Act, 1948

Termination of the system of automatic

monetization

Issues of transparency and accountability governing operations Draft legislations by RBI during the same period

Central banking and its independence in measuring

autonomy

Indian experience through recourse to periodisation Emerging issues in India

Creation of Money or monetary management Management of public debt of government Regulation and supervision of banking entities

Financing of developmental activities

Function of debt management and autonomy(No autonomy) Regulation and supervision(Same as other bodies)

Developmental role (Central bank and government)

Political power and limitation on credit to government

Napoleon Bonaparte commented in 1806, on Bank of France; I want the bank to be in the hands of the Government, but not too much.

Personal matters: Appointment, term of office and

dismissal procedures of top central bank officials

Financial aspects: The extent to which govt.expenditure is either directly or indirectly financed via central bank credits Conduct of policy: Flexibility given to the central bank in the formulation and execution of monetary policy

Goal independence refers to a situation where the

central bank itself can choose the policy priorities of

stabilizing output or prices at any given point of time, thus setting the goal of monetary policy

Instrument independence implies that the central bank

is only free to choose the means to achieve the objective set by the government.

Most banks define independence only in terms of

Instruments

Time inconsistency theory

Time inconsistency arises when the best plan currently made for
sure future period is no longer optimal when that period actually starts.

In the context of monetary policy the time inconsistency problem arises because there are incentives for a politically motivated policy maker to try to exploit the short run trade-off between employment and inflation.

Example: Expansionary monetary policy

Conservative central bank approach: It postulates the appointment of a conservative central banker whose aversion to inflation is well known which would result in low inflation because of the economic agents belief in the reputation of the central banker. Example: Unites States Optimal contract approach: It postulates the existence of an optimal contract between the central banker and the government. The central bankers tenure in office is conditional upon his performance of achieving low inflation, failure of which would lead to the repudiation of the contract of tenure. Example: New Zealand

THE POLITICAL BUSINESS CYCLE THEORY

Studies the interaction between economic policy

decisions and political considerations. The business cycle mirrors The timetable of the election cycle

THEORY OF PUBLIC CHOICE

Constitutional amendment for a pre-specified
stipulation on central bank credit to government Fusion of politics and economics Theorists view : Politicians do not necessarily pursue public interest but are more concerned

with their personal or political agenda.

Independent central bank lacks democratic legitimacy Milton Friedman money is too important an issue to be left to the whims of central bankers Independence may lead to frictions between the fiscal and monetary authorities which may be somewhat costly for society, thus inhibiting the development process. Significant divergence in the preference pattern of independent central banks and the society at large

Informal arrangements with governments The quality of the personnel in the bank as well as Government and the personal

characteristics of key individuals

Legal Independence:
Indices of political and economic independence Frequency of transfers of central bank governors

Negative correlation between Central Bank Autonomy & Inflation Bi-directional: Since it is argued that persistent high inflation led to changes in the operational and legal framework Central Banks Autonomy cannot ensure monetary policy credibility, which also depends on credibility of government policy Autonomy is a means to achieve division of responsibility between monetary & fiscal authority and policy co-ordination

Infancy/Uncertainty Phase (1927-1948)

Legislation to set-up in 1927, enactment in 1934; RBI set up as a privately owned / managed entity focused on monetary stability and operations on currency and credit system Subservient to the dictates of the Government; measures taken to curb its board from taking independent actions

Maturing into a full-fledged Central Bank (1948-

1969)

Good fiscal rectitude and harmony in monetary and fiscal policy Modest rate of inflation, success of macro-policy management facilitated RBI in pursuing other developmental activities Institutionalisation of credit to agriculture and industry in pursuant to the objectives of Five-Year Plans

From Owners to Supervisors (1969-1990)

Nationalization of banks Transfer of ownership leading to a state of Captive market for the Government For easy access of market borrowing, administration of key interest rates, SLR, CRR periodically revised

During this period there were some areas of conflict with Government, these involved
Physical planning subduing financial planning was disapproved Differences over Interest rate policies, Deficit financing, corporate credit policies, management of sub-standard banks

Opening the markets with Reforms (1990 onwards)

Severe balance of payments crisis in the beginning Abolition of Ad Hoc T-Bills Opening up of economy through clearer articulation of policy goals Moderate rate of inflation inspite of high Fiscal deficit Financial reforms including strengthening of banking supervision

In an approach towards redefining the functions of the RBI and enabling a movement towards meaningful autonomy there were some considerable steps taken
Divestment of RBI from all ownership functions in commercial Banking, development finance & security trading Separation of Government Debt management from

monetary policies enabling RBIs role to primarily focus

on monetary policies & move towards greater autonomy

At the level of constitution

Only few references to autonomy of Central Bank in

the constitution

At the level of legislative framework

Proposed fiscal responsibility, budget management

bill and other amendments in RBI act

Suggestions of advisory groups and internal

committees

At the Policy Level

Fiscal dominance warranting large

involuntary financing of credit by RBI Underdeveloped state of Financial markets partly due to legal & institutional constraints blunts the effectiveness of Monetary policy

Considerable scope to reduce micro

At the operational & procedural level

management issues The approach basic tenets of accounting principles in regard to transactions between RBI & Government