<b>Ajay Shah:</b> RBI independence: The middle ground

In the principal-agent relationship of finance ministry and RBI, autonomy arguments are weak

The demonetisation drama has brought debates about Reserve Bank of India’s (RBI’s) independence to the fore. There are two extreme views. Some argue that when the chips are down, the power of the Ministry of Finance must be unchallenged. Section 7 of the RBI Act reflects this view. Others argue in favour of extreme RBI independence. The truth lies in between: There is a case for regulatory independence in licensing and investigation, and monetary policy independence in the control of monetary policy instruments. In other areas, what is required is a sound board, where the Ministry of Finance should have