Secure RBI independence through direct accountability to Parliament

Inflation management, just like justice delivery, is a counter-majoritarian function. Courts and central banks often face pressure from elected governments while doing their job. Apart from formulating monetary policy, RBI also regulates government-owned banks and wields vast discretion on India’s currency policy, which empowers it to pick winners and losers in the economy. 

If RBI’s independence is critical to its credibility, why are a governor’s post-retirement choices not viewed as critically as those of judges?

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This could be because it is clear to many that RBI enjoys little independence under the law. The RBI Act empowers the government to determine its board composition and the tenure of its members within an upper ceiling of five years; the Centre also decides whether to renew their term and can remove them from office. 

How has this played out in reality? 

Of the 22 governors who have led RBI from 1949 till 2024, 13 were civil servants in the government’s employment immediately before their appointment to the role. Of the other nine, at least four took up political appointments right after their RBI term. Further, RBI governors who were former civil servants have served for longer durations at the central bank’s top—an average of almost 4.2 years, compared to the overall average of just above 3.4 years. The average for the non-civil-servant RBI governors is a little over 2.3 years.

As if control of board composition is not enough, the law empowers the government to give such directions to RBI “as it may, after consultation with the Governor of the Bank, consider necessary in the public interest.” 

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New Delhi may direct the central bank on questions of policy, management or its operations, without such directions being published. RBI’s vulnerability to political pressure from the government also seems apparent in media stories of RBI-government conflicts, public speeches of RBI board members and the anecdotes of former governors in their biographies. Thus, common knowledge of the state of RBI’s independence perhaps shields the post-retirement role of an RBI governor from meaningful scrutiny.

The adoption of inflation targeting in 2016 further reduced a seeming need for such scrutiny, as it vested the power of setting the policy rate— until then the RBI governor’s sole prerogative—in a monetary policy committee.

In an environment where the fragility of RBI’s independence has largely been normalized, how do we safeguard its independence better? The idea of prohibiting RBI executive board members from taking up political appointments for some time after the completion of their term, while viable, does not address the deeper concern of ongoing political pressures. 

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A more holistic response would be to make RBI accountable to India’s Parliament, which the current law does not do. As per an RBI report published in 2000, “[Any] presentation by RBI before a Parliamentary Committee is only by way of a supportive role for government officials deposing before a Parliamentary Committee.” The courts too have been sanguine on the issue of RBI’s accountability to Parliament.

The current arrangement, which exempts RBI from direct accountability to Parliament, deprives it of the natural checks that would emerge in a multi-party legislature. Opposition members of Parliament are likely to ask uncomfortable questions, which would grant RBI greater leeway to resist pressure from ruling party-led governments. The absence of such feedback loops makes RBI more vulnerable to political pressure from the government of the day.

An example of this played itself out in December 2022. Having failed to maintain inflation within tolerable levels for three consecutive quarters, RBI was required by the law to report the reasons for its failure to the government. While RBI duly submitted a written report on this to the government, the latter refused to table this report in Parliament when asked by a few legislators to do so. 

This incident demonstrates that RBI’s exemption from direct parliamentary accountability effectively makes it ‘accountable’ only to the government for inflation management.

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This is the opposite of what theory prescribes and what inflation management warrants. Centralizing both RBI appointments and the oversight of its performance in the government also stands in sharp contrast with practices followed in developed markets that mostly manage to keep inflation stable over the long-run, such as the US, Japan and the EU. 

The laws of these countries give the legislature some say in the appointment of central bank governors and require them to testify before legislative committees at regular intervals on the performance of the central bank.

In India, calls for enhancing RBI’s parliamentary accountability are often met with scepticism that such accountability would undermine its independence. A deeper analysis of the actual state of RBI’s independence and provisions of the RBI Act would suggest the opposite.

The author is a doctoral scholar at the National University of Singapore.