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Autonomy of RBI - Issues and Challenges
Recently, the central bank of the country, Reserve bank of India, is witnessing raging debates on the issue of its autonomy. Questions are being raised on independence of the central bank, especially in four different dimensions statutory independence from the state in regards to tenure, termination and nomination of governor of RBI; independence of instruments of monetary policy in regards to management of interest rate and liquidity; independence of objectives of monetary policy inflation targeting, priority sector lending, credit control etc; and financing of government deficit. Incidentally, the most independent central banks in the world are Latvia, Hungary, Armenia and Bosnia. The least independent central banks are India, U.S., Singapore and Saudi Arabia. There is a clear difference between the functioning of central banks in advanced and emerging countries. In advanced countries, the financial institutions are mature and financial markets are developed and seamlessly integrated such that the central banks can focus on pursuing a single objective using a single monetary instrument. The Emerging Market Economies are characterized by underdeveloped financial markets, an inefficient transmission mechanism and ownership of financial institutions by government. As such independence of central bank can be quite harmful. Because of ineffective transmission of monetary policy, the central banks of EMEs often have to intervene in different isolated markets and pursue diverse activities. They also need to make sure that banks and financial institutions remain robust and stable. Along with many other objectives, pursuing financial inclusion remains an important goal. As the central governments in EMEs have multiple objectives, increased coordination with government is required to jointly face the challenges in the system. In India, the objective of macro policy is economic welfare and both the wings of macro policy - monetary and fiscal have to work together to achieve it.

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