Ever since the nationalization of a host of large and medium-sized private sector banks in the 1970s, the government has exercised more power and authority with regard to the management of these banks than RBI. The government interfered not only with deposit and lending rates but even with the choice of clients and business priorities of banks. RBI had to come into the picture only when most of these banks faced big liquidity crisis caused by piled-up volumes of non-performing assets on account of reckless government credit policies and nexus between banks and politicians. The central bank had no choice but to unhappily recapitalize these banks at the instance of the government.

The independence of RBI's monetary policy from the government's fiscal compulsions, which Subbarao spoke about in his recent C D Deshmukh memorial lecture at Hyderabad, has always been under threat. He certainly knew what he was talking about. Only two days before his lecture, RBI's deputy governor K C Chakrabarty was stripped of all his key executive powers ostensibly for suggesting the need for higher lending rates for inflation control, which bore an immediate impact on the market rates and trading volume of government of India bonds. One would like to know who was behind such an unprecedented unceremonious act to humiliate Chakrabarty. Could there have been a hand of some powerful industrial houses or business lobby behind the angry action? After all, it is neither unusual nor uncalled-for of a RBI governor or deputy governor to talk about interest rate hikes in the face of spiraling inflation.

Curiously, soon after Subbarao's critical statement on government control over the central bank, another deputy governor was quick to go public to emphasise that the current interest rates were adequate enough to control inflation. One would also like to know who authorized this second RBI deputy governor to parrot the North Block point of view on the subject in total disregard to the sentiment expressed by his boss only 24 hours ago. No Sir, the 0.5 per cent rate hike by RBI is simply not good enough to control the current double digit inflation, which is severely pinching the pocket of the poor and the ordinary people. Deposit rates of commercial banks are far below the inflation rate. The inflation rate has highly depreciated the value or the purchasing power of the currency. The common man is struggling to cope up with rising prices of wage goods as well as consumer items of daily necessity. It is the job of RBI to try to restore the value of money and control inflation by raising interest rates among other monetary measures. Simultaneously, the government has to take necessary fiscal measures to manage the supply side. Cheap money helps only the big business. Cheap money does not douse inflation. It further fuels inflation. The government is more interested in maintaining the high economic growth rate than controlling the high inflation rate. The policy serves only the interest of the big business, foreign investors and the stock market at the cost of the common man. And, RBI is caught in a policy logjam. The unfortunate part of the latest debate on RBI's autonomy is the fact that Subbarao, a former union finance secretary and a senior staff member in the prime minister's office (PMO), who batted himself for the government to dominate the monetary policy during the previous peak inflation years of 2007 and 2008, is now made to taste his own medicine.

On paper, governor of the Reserve Bank enjoys autonomy of that of a constitutional authority. In practice, he is expected to work like those 'favoured few' in the government and be part of it. The RBI top appointee is always a nominee of the government, more often a retired finance secretary or a bureaucrat who has been in the good books of finance minister and prime minister as it is in the case of Subbarao. The RBI top dog is expected to read and understand his master's mind well and tow the line of the government, in general, and the finance ministry, in particular, although their functions - fiscal management and monetary management — and responsibilities are not similar. The central bank is the ultimate banking regulator. It is the banker of all banks, operating within the geographical limits of the country. It is the ultimate 'clearing house'. It is the banker of the nation. It holds the country's gold and foreign exchange assets and regulates their inflow and outflow to ensure financial security and economic stability of the country. Among its various routine functions, RBI prints and imports, whenever necessary, currency notes, controls money supply, decides on banks' cash reserves ratio, exercises reverse purchase options, fixes capital adequacy ratio of banks to ensure their healthy operation and investor security and fixes bank rate to strike a balance between the need for economic growth and control money supply to check inflation. In times of crisis, it acts as a banker of the last resort to the government.

Few will disagree on the matter of fact that RBI has failed as a monetarist to contain the nagging price inflation. Inflation control is a key function of any central bank anywhere in the world. RBI has failed because it has not been allowed to pursue independent monetary policies. Instead of curbing excessive government controls and its regulatory powers, the process of economic reform has made the state even more powerful controller of economy and public life than before. The so-called independent regulatory authorities enjoy little autonomy, in practice. Their policy making machinery is hamstrung as also henpecked, looking all the time for government approval of vital decisions and actions. The latest decision of the government to promulgate an ordinance and formulate a high profile committee, headed by the finance minister, with overriding powers to handle disputes between or among regulatory authorities, is a major cause of concern of all regulators, including the country's central bank. The move, it is feared, will lead to further concentration of economic and financial powers with the union government invariably leading to political and bureaucratic interference in the operations of the regulatory authorities and increase corruption. (IPA Service)