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• Freedom first RBI chief Urjit Patel and his deputy Dr Viral V Acharya are batting for independence of the regulatory institution

tively create tail risks for the economy. working by blocking or opposing its efficiency and expertise over time.
To protect the economy from such rule-based central banking policies, When important parts of financial in-
short-termism, the central bank is de- and favoring instead discretionary termediation are kept outside the pur-
signed to be at a safe distance from the or joint decision-making with direct view of the central bank, systemic risks
executive branch of the government. government interventions; and by set- can build up in “shadow banking” with
ting up parallel regulatory agencies private gains in good times to a small
Influencing RBI working with weaker statutory powers and/or set of players but at substantive costs to
Now, although the central bank is for- encouraging development of unregu- future generations in the form of un-
mally organised to be separate from lated entities that perform financial checked financial fragility.
the government, its effective horizon intermediation functions outside the
of decision-making can be reduced for purview of the central bank. Accountable to people
short-term gains by the government, There are several reasons why The central bank can of course make
if it so desires, through a variety of enshrining and maintaining central mistakes, and is generally held public-
mechanisms, like appointing govern- bank independence ends up being an ly accountable through parliamentary
ment officials rather than technocrats inclusive reform for the economy; and scrutiny and transparency norms. This
to key central bank positions, such as conversely, undermining such inde- way, the institutional arrangement
Governor, and more generally, senior pendence a regressive, extractive one. of independence, transparency and
management. Another way is pursu- When governance of the central accountability to the public not only
ing steady attrition and erosion of bank is undermined, it is unlikely to balance but also strengthen the cen-
statutory powers of the central bank attract or be able to retain the bright- tral bank’s autonomy. However, direct
through piece-meal legislative amend- est minds that thrive on the ability to intervention and interference by the
ments that directly or indirectly eat at debate freely, think independently, government in operational mandate of
separation of the central bank from and effect change; attrition of central the central bank negate its functional
the government. bank powers results in attrition of its autonomy.
The government can control its human capital and deterioration of Macroeconomic management can

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