Why Accountability of RBI is important?

 Democracy: In a democracy,
sovereignty lies with the people. And
government, not the central bank, is
answerable to the people. If the
Reserve Bank, for instance, fails to
keep inflation low, it is the
government that pays the price, not
RBI.
 Answerable in failures: The flip side
of autonomy is accountability and the
RBI should be answerable if it fails to
achieve these goals. The progressive
widening and deepening of the
activities of the RBI in different
sectors of the economy affect the
lives of millions. Hence any type of
failure should be answerable by RBI.
 More transparency: The central bank
can also make mistakes, and is
generally held publicly accountable
through parliamentary scrutiny and
transparency norms. This ensure
more transparency in the system with
clearly defined roles.
 Accountable through Government:
The RBI is autonomous but within the
framework of the RBI Act. Hence
Central bank cannot claim absolute autonomy. It is autonomy within the limits set by the government
and its extent depends on the subject and the context.
Way forward
 Balancing autonomy and accountability: Institutional autonomy of RBI has to be respected and all
institutions will have to work together to achieve the common goal.
o There has to be a forum within our democratic structure where the RBI is obligated to explain and
defend its position.
o There is a need to pay due regard to both autonomy and accountability. For example - we have an
inflation targeting model now and the central bank is accountable for its inflation targeting.
Similarly, there can be such autonomy and accountability for financial sector regulation by creating
some desirable objectives.
 Implementing recommendations of Financial Sector Legislative Reforms Commission (FSLRC): FSLRC
sought to modernize governance and make regulators more independent as well as more accountable.
o For example, it proposed to do away with the government’s power to give directions, while it sought
to make boards of regulators more accountable and transparent with agenda and minutes of board
meetings to be public.
 Separation of domains: Since the goals of the government and the RBI coincide, both have to respect
each other’s operational space. While economic growth is impossible without adequate credit, the RBI
needs to ensure that its policies do not hamper the growth of credit and investment.
 Review of regulatory powers: If regulatory powers need a review, Parliament should make law
accordingly. There should be clarity on the regulatory powers of RBI as well as Government.

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