Extent of RBI autonomy

With reference to Ajay Shah’s article, “RBI independence: The middle ground” (January 23), the nature and extent of the Reserve Bank of India’s (RBI) independence of the central government has been a major point of discussion since demonetisation on November 8.

The issue is not new; it had cropped up on earlier occasions since the RBI was nationalised. During his time as prime minister, Jawaharlal Nehru also expressed his view on the topic in his letters to then RBI governor B Rama Rau between December 12, 1956, and January 7, 1957. The exchange of letters culminated in Rau’s resignation from the post.

The exchange of letters began with Nehru telling Rau that he was surprised by his (Rau) agitated approach against the central government and the improper language of his memorandum to the RBI’s central board. 

Nehru said it was for the government to frame policies; the RBI could not have policies contrary to those of the government. The former prime minister said the RBI was no doubt “autonomous”, but still subject to government directions. 

When Rau cited instances of the government not consulting the RBI on matters of monetary policy, Nehru refused to accept the charge. 

When Rau wrote he would like to resign, Nehru said he would like him to continue, but if he felt it was impossible for him to do so, “you can submit your formal resignation to the finance ministry”. Rau’s resignation followed shortly afterwards. 

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