the purpose a year ago. hence, there is merit in taking a view on the broader issue of independence of the central bank in india, so that the process of change is negotiated smoothly and in a consistent form, thus avoiding the danger of what may be termed as “ disjointed incrementalism ” in reform through ill - defined goals. the lecture will be in three parts. the first one defines central banking, and its independence, while providing theoretical and empirical evidence for and against independence or autonomy ( both words are used interchangeably in this lecture though autonomy and independence could have slightly different connotations ) and explaining difficulties in its measurement. the second part reviews the indian experience through recourse to periodisation and makes an assessment of the current situation. the third section focusses on the emerging issues in india and concludes with some random thoughts on the autonomy of central banks. what is central banking? the central banking functions typically include not only creation of money or more broadly monetary management, but, also often, management of public debt of government, regulation and supervision of banking entities, financing of developmental activities and other associated functions. while discussing the issue of autonomy, it is necessary to recognise that the function of debt management is essentially performed by a central bank as an agent of government and the issue of autonomy does not arise. in fact, this function could be in conflict with autonomy in the conduct of monetary policy. as regards the function of regulation and supervision, the argument for involvement of a central bank emerges from the role of lender of last resort and the obligation to smoothly operate the payments system. in this regard, the autonomy that the central bank exercises is no different from autonomy of any regulator in the financial system. as far as the developmental role is concerned, close coordination with government necessarily arises, which in some ways impinges on autonomy as it is in a way linked to money creation. what is uniquely relevant for a central bank ’ s independence is its exercise of the power to modulate the creation of money and the price of money, which impacts on the value of money, both domestic and external. in this context, the critical issue relates to the degrees of freedom the central bank has in deciding whether or not to fund the government ’ s expenditure out of created money. the view that central banks should be largely independent of political power and that the central bank credit to government should be formally limited is generally believed to have emerged only in th 20 century. it would, however

financial markets, the operational framework of the rbi also changed considerably with clearer articulation of policy goals and more and more public dissemination of vast amount of data relating to its operations. partly as a result of such institutional changes in recent years, inflation in india has been moderate relative to other developing countries despite high fiscal deficit, and most inflationary episodes have been caused by exogenous supply - side factors. as far as public finances are concerned, the government generally relied on domestic sources to finance the deficit. it has been pointed out by some experts that the rbi, though not formally independent, has enjoyed a high degree of operational autonomy during the post - reform period. in fact, during the recent period, the rbi enjoys considerable instrument independence for attaining monetary policy objectives. significant achievements in financial reforms including strengthening of the banking supervision capabilities of the rbi have enhanced its credibility and instrument independence. current status in terms of redefining the functions of the rbi, enabling a movement towards meaningful autonomy, governor jalan ’ s statement on monetary and credit policy on april 19, 2001 is a landmark event. first, it was decided to divest rbi of all the ownership functions in commercial banking, development finance and securities trading entities. secondly, a beginning was made in recommending divestiture of rbi ’ s supervisory functions in regard to cooperative banks, which would presumably be extended to non - banking financial companies and later to all commercial banks. thirdly, the rbi signalled initiation of steps for separation of government debt management function from monetary policy. these measures would enable the rbi to primarily focus on its role as monetary authority and enhance the possibility of a move towards greater autonomy. three other developments in recent years are expected to have far reaching ramifications in the operational framework of monetary policy in india. the first was the tabling of the fiscal responsibility and budget management legislation, which aims at the medium - term management of the fiscal deficit. the objective of the legislation is to impose fiscal discipline on government spending and ensure a transparent and accountable fiscal system. the second development was the coordinated endeavour of the government of india and the rbi to consider the implementation of international financial standards and codes. among the ten advisory groups constituted for this purpose, the advisory group on fiscal transparency ( chairman : mr. m. s. ahluwalia ) and the advisory group on transparency in monetary and financial policies ( chairman : shri m. narasimham ) have suggested some important changes in the operational conduct of monetary and fiscal policies and highlighted the