Central bank autonomy and its crypto plot twist 

Source: The post is based on an article “Central bank autonomy and its crypto lot twist” published in the Live Mint on 31^st July 2022.

Syllabus: GS 2 Issues and Challenges pertaining to the growth and development of the Indian Economy

News: At present, there are arguments that the Central banks should have functional autonomy to target their aim of country’s financial stability and development.

Situations at present – The loss of autonomy of the central banks in India 

Nowadays, the liberty of the central banks is bounded under the legal mandate. For example, in 2016, the Reserve Bank of India was given a mandate to keep inflation within in particular range. Therefore, there is a special panel to decide the monetary rate policy, in which the government’s appointees also play important role.

Further, the RBI-Centre relations went through a rocky patch around the time of demonetization.

Last year, RBI’s target band was renewed till the end of 2025-26. However, there are elections in 2024 which might impact it.

What are the arguments for more autonomy to central banks?

First, we can look at the example of the US. US Federal Reserve has autonomy in decision making. It is not forced to make price stability, its top priority and can take the decisions on the basis of long-term benefit to the economy.

Second, separation of powers based on expertise is seen to maximize public welfare. It is being followed in many other countries as well.

Third, at present, most of the economies are the crypto disruption. Central banks must make serious policy efforts the strengthen their currencies.

What are the arguments against more autonomy to the Central bank?

One, all policies in a democracy must stay accountable to people via elected governments; and

Second, since monetary and fiscal policies do not work in isolation. They work in tandem, especially in times of crisis. Therefore, the bank’s relations with the government or treasury mustn’t go awry.