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Controversy around the independence of the Reserve Bank of India

Categories : Cash has legal tender status, Cash is universal
February 1, 2017
Tags : Asia, Banknote/Note, India, Transaction
The debate about the Reserve Bank of India's independence from the government was triggered again after the demonitisation of Rs 500 and Rs 1000.
Communication Team / Equipo de Comunicación

The demonetisation of India’s Rs 500 and  Rs 1,000 notes reopened the debate over the central bank’s autonomy. Indeed, the Reserve Bank of India’s (RBI) independence from the government has been questioned for decades, and many people including former RBI governors, wonder if the central bank had a say in the withdrawal of those two denominations. Moreover, the appointment of a joint secretary responsible for coordinating cash operations at the RBI by the Ministry of Finance has been very badly received among RBI employee unions.

Nevertheless, this sort of collaboration between the RBI and the government is expressly authorized in the RBI Act, which states that the government is allowed to give directions to the bank if it is in the public interest and after consultation with the governor. Conversely, the government may declare that any series of banknotes shall cease to be legal tender by notification in the Gazette of India upon recommendation of the central bank.

A large part of the population was disappointed by the docility of the RBI and would have preferred that it resist or at least discuss the move decided by the government – even though many wonder if the central bank even has the power to oppose such a decision.

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