As per report the government is asking the RBI to review its policies in several areas where the central bank should be allowed to operate without interference as this is not an entirely new fight. Meanwhile the successive RBI governors after Bimal Jalan have had to fight for operational independence with the finance ministry, but the current set of disagreements comes at a bad time.
Furthermore emerging markets in general are under pressure. Accordingly India is still some time away from achieving financial stability by solving the twin balance sheet problem bad assets at banks and corporate hamstrung from raising credit. Further riding roughshod over the central bank could easily lead to heavy capital outflows and delay the rehabilitation of the banking system.
Moreover if the government amends the RBI Act to
force the central bank to cough up more dividend, it will set a dangerous
precedent and hence this is not to say that there is no need for debate about
the effectiveness of RBI’s regulation over the banking system. RBI should be
set to high standards and taken to task if it fails. As per report the correct
way to change policy would be set clear goals and objectives the flexible
inflation targeting framework is a great example and allow RBI the operational
room to do its job
