I have been reading editorials and news articles by several commentators giving exhortations to Urjit Patel to make RBI an independent body. Making a controversy in a place where there is none.
I don’t believe in this premise that RBI has to be an independent body.
I support Central Bank, if at all it has to be there, should be rather, part of Finance Ministry than to be independent.
For the below stated reasons.
A single locus of power on monetary and fiscal policies is better and would establish accountability for mistakes in policy that otherwise leave each institution free to blame the other for policy errors. Say, if inflation rises in the time to come, each institution will start blaming the other for not handling the role properly. Inflation control is not possible only by RBI or by Finance ministry.
A central bank could be independent only if it had no conflict with the rest of government, (For ex, Judiciary has separate role chalked out for it, therefore it has to be independent) but the monetary and fiscal policies are a always dependent and in direct conflict, the bank should unquestionably give way to the fiscal authorities.
We need to understand that in a democracy it would be wrong to place such concentrated power with regards to money in a group free from any kind of direct political control for a simple reason that it is unelected.
An independent central bank can even shred the responsibility in times of uncertainty and difficulty; and it will become subject to undue influence to the opinions of bankers.
The public trust of financial activity will come only if there is accountability mechanism.
The current set up is optimum, esp., with Monetary Policy Committee in place, there is no need for a totally independent RBI.
There is another line of argument made by The Hindu editorial here, couple of months ago, but the premise is the same, RBI can’t be independent.