Question Description
DIRECTIONSfor the question (54 to 56):Read the passage and answer the question based on it.The Reserve Bank of India has worked as efficiently as any top central bank of the world right from its inception. It was blessed with absolute independence to control or manage monetary liquidity, price stability, exchange rate stability, and later on financial stability also. The governor and his team have ably served the nation during all the financial storms and crises, domestic as well as external, that beset the country.In the early, post-Independence period, the RBI is credited with monetisation of the entire economy by promoting and launching rapid branch expansion of commercial banks and the setting up of financial institutions such as the Industrial Finance Corporation of India (IFCI), the IDBI and co-operative banks, giant insurance companies and so on. Today’s strong financial system stands on the shoulders of the RBI, and this pyramidal edifice has been possible due to the independence given to the governor under the RBI Act, 1934.However, for the last few years, the Union government has been making efforts to dilute the power of the RBI by distorting the independence of the central bank. Of course, in a way, some of the principles of central banking have been overlooked from the time the political administration started interfering in the appointments of the governor and the deputy governors of the central bank, approving the salaries and wages of RBI employees, and directing the monetary policy through distribution of bank credit by way of priority sector policy.But the move to restructure the monetary policy committee (MPC) marks the biggest dent yet in the independence of the RBI. Earlier, the governor used to appoint one member of the committee and had a say in two more. The remaining three members were appointed by the government. Now, the committee will be headed or chaired by the governor, who will only have a say in one appointment. One appointment will be done by the Reserve Bank Board from among the executive officers; one employee of the RBI will be nominated by the governor, while four persons will be appointed by the Centre. Moreover, the governor will not have veto powers, though he can exercise a tie-breaker vote in case of a tie.If the present draft is approved, the governor will find himself in an isolated situation. As regards the committee, its quality of discussion will be lowered since it is possible that the ruling parties today or in the future would like to appoint their own representatives as members of the MPC and not on the basis of merit.For instance, there can be a lot of liberal deficit financing with the pretext of increasing employment and economic growth. Moreover, where the governor is not strong, the varying opinions of different members of the MPC can impact the decision-making powers. However, this weakness can be removed by publishing individual policymakers’ views on the RBI’s website whenever the views are at odds with one another.In a central bank dominated by the government, the temptation to tamper with various instruments of monetary policy in order to achieve the government’s objectives would be hard to resist. For instance, the ministry of finance could want to reduce interest rate to push up demand, without considering the impact of rate cut on foreign inflows, depreciation of the rupee and increase in domestic money stock and inflation. There could be many more such examples.This situation can only be countered by having a robust governor with absolute independence in charge of the RBI. Of course, more independence has to be reconciled with more personal accountability on the part of the governor as well as that of other financial institutions. The governor should be responsible and accountable to Parliament and not to a particular government or the ministry of finance, or minister.The fears of a discretionary monetary policy adversely impacting the economy are not unfounded. There are a number of studies that have revealed that there is a reverse relationship between inflation and independence of the monetary authority; the higher the independence of the central bank, the lower the inflation. Giving higher discretionary powers to the central bank has been seen to be successful in many other countries.An apt title for the passage is:a)Govern the RBI Governorb)The Finance Minister is not the RBI Governorc)The importance of a strong RBI Governord)The importance of an independent RBICorrect answer is option 'D'. Can you explain this answer? for CAT 2025 is part of CAT preparation. The Question and answers have been prepared according to the CAT exam syllabus. Information about DIRECTIONSfor the question (54 to 56):Read the passage and answer the question based on it.The Reserve Bank of India has worked as efficiently as any top central bank of the world right from its inception. It was blessed with absolute independence to control or manage monetary liquidity, price stability, exchange rate stability, and later on financial stability also. The governor and his team have ably served the nation during all the financial storms and crises, domestic as well as external, that beset the country.In the early, post-Independence period, the RBI is credited with monetisation of the entire economy by promoting and launching rapid branch expansion of commercial banks and the setting up of financial institutions such as the Industrial Finance Corporation of India (IFCI), the IDBI and co-operative banks, giant insurance companies and so on. Today’s strong financial system stands on the shoulders of the RBI, and this pyramidal edifice has been possible due to the independence given to the governor under the RBI Act, 1934.However, for the last few years, the Union government has been making efforts to dilute the power of the RBI by distorting the independence of the central bank. Of course, in a way, some of the principles of central banking have been overlooked from the time the political administration started interfering in the appointments of the governor and the deputy governors of the central bank, approving the salaries and wages of RBI employees, and directing the monetary policy through distribution of bank credit by way of priority sector policy.But the move to restructure the monetary policy committee (MPC) marks the biggest dent yet in the independence of the RBI. Earlier, the governor used to appoint one member of the committee and had a say in two more. The remaining three members were appointed by the government. Now, the committee will be headed or chaired by the governor, who will only have a say in one appointment. One appointment will be done by the Reserve Bank Board from among the executive officers; one employee of the RBI will be nominated by the governor, while four persons will be appointed by the Centre. Moreover, the governor will not have veto powers, though he can exercise a tie-breaker vote in case of a tie.If the present draft is approved, the governor will find himself in an isolated situation. As regards the committee, its quality of discussion will be lowered since it is possible that the ruling parties today or in the future would like to appoint their own representatives as members of the MPC and not on the basis of merit.For instance, there can be a lot of liberal deficit financing with the pretext of increasing employment and economic growth. Moreover, where the governor is not strong, the varying opinions of different members of the MPC can impact the decision-making powers. However, this weakness can be removed by publishing individual policymakers’ views on the RBI’s website whenever the views are at odds with one another.In a central bank dominated by the government, the temptation to tamper with various instruments of monetary policy in order to achieve the government’s objectives would be hard to resist. For instance, the ministry of finance could want to reduce interest rate to push up demand, without considering the impact of rate cut on foreign inflows, depreciation of the rupee and increase in domestic money stock and inflation. There could be many more such examples.This situation can only be countered by having a robust governor with absolute independence in charge of the RBI. Of course, more independence has to be reconciled with more personal accountability on the part of the governor as well as that of other financial institutions. The governor should be responsible and accountable to Parliament and not to a particular government or the ministry of finance, or minister.The fears of a discretionary monetary policy adversely impacting the economy are not unfounded. There are a number of studies that have revealed that there is a reverse relationship between inflation and independence of the monetary authority; the higher the independence of the central bank, the lower the inflation. Giving higher discretionary powers to the central bank has been seen to be successful in many other countries.An apt title for the passage is:a)Govern the RBI Governorb)The Finance Minister is not the RBI Governorc)The importance of a strong RBI Governord)The importance of an independent RBICorrect answer is option 'D'. Can you explain this answer? covers all topics & solutions for CAT 2025 Exam. Find important definitions, questions, meanings, examples, exercises and tests below for DIRECTIONSfor the question (54 to 56):Read the passage and answer the question based on it.The Reserve Bank of India has worked as efficiently as any top central bank of the world right from its inception. It was blessed with absolute independence to control or manage monetary liquidity, price stability, exchange rate stability, and later on financial stability also. The governor and his team have ably served the nation during all the financial storms and crises, domestic as well as external, that beset the country.In the early, post-Independence period, the RBI is credited with monetisation of the entire economy by promoting and launching rapid branch expansion of commercial banks and the setting up of financial institutions such as the Industrial Finance Corporation of India (IFCI), the IDBI and co-operative banks, giant insurance companies and so on. Today’s strong financial system stands on the shoulders of the RBI, and this pyramidal edifice has been possible due to the independence given to the governor under the RBI Act, 1934.However, for the last few years, the Union government has been making efforts to dilute the power of the RBI by distorting the independence of the central bank. Of course, in a way, some of the principles of central banking have been overlooked from the time the political administration started interfering in the appointments of the governor and the deputy governors of the central bank, approving the salaries and wages of RBI employees, and directing the monetary policy through distribution of bank credit by way of priority sector policy.But the move to restructure the monetary policy committee (MPC) marks the biggest dent yet in the independence of the RBI. Earlier, the governor used to appoint one member of the committee and had a say in two more. The remaining three members were appointed by the government. Now, the committee will be headed or chaired by the governor, who will only have a say in one appointment. One appointment will be done by the Reserve Bank Board from among the executive officers; one employee of the RBI will be nominated by the governor, while four persons will be appointed by the Centre. Moreover, the governor will not have veto powers, though he can exercise a tie-breaker vote in case of a tie.If the present draft is approved, the governor will find himself in an isolated situation. As regards the committee, its quality of discussion will be lowered since it is possible that the ruling parties today or in the future would like to appoint their own representatives as members of the MPC and not on the basis of merit.For instance, there can be a lot of liberal deficit financing with the pretext of increasing employment and economic growth. Moreover, where the governor is not strong, the varying opinions of different members of the MPC can impact the decision-making powers. However, this weakness can be removed by publishing individual policymakers’ views on the RBI’s website whenever the views are at odds with one another.In a central bank dominated by the government, the temptation to tamper with various instruments of monetary policy in order to achieve the government’s objectives would be hard to resist. For instance, the ministry of finance could want to reduce interest rate to push up demand, without considering the impact of rate cut on foreign inflows, depreciation of the rupee and increase in domestic money stock and inflation. There could be many more such examples.This situation can only be countered by having a robust governor with absolute independence in charge of the RBI. Of course, more independence has to be reconciled with more personal accountability on the part of the governor as well as that of other financial institutions. The governor should be responsible and accountable to Parliament and not to a particular government or the ministry of finance, or minister.The fears of a discretionary monetary policy adversely impacting the economy are not unfounded. There are a number of studies that have revealed that there is a reverse relationship between inflation and independence of the monetary authority; the higher the independence of the central bank, the lower the inflation. Giving higher discretionary powers to the central bank has been seen to be successful in many other countries.An apt title for the passage is:a)Govern the RBI Governorb)The Finance Minister is not the RBI Governorc)The importance of a strong RBI Governord)The importance of an independent RBICorrect answer is option 'D'. Can you explain this answer?.

Solutions for DIRECTIONSfor the question (54 to 56):Read the passage and answer the question based on it.The Reserve Bank of India has worked as efficiently as any top central bank of the world right from its inception. It was blessed with absolute independence to control or manage monetary liquidity, price stability, exchange rate stability, and later on financial stability also. The governor and his team have ably served the nation during all the financial storms and crises, domestic as well as external, that beset the country.In the early, post-Independence period, the RBI is credited with monetisation of the entire economy by promoting and launching rapid branch expansion of commercial banks and the setting up of financial institutions such as the Industrial Finance Corporation of India (IFCI), the IDBI and co-operative banks, giant insurance companies and so on. Today’s strong financial system stands on the shoulders of the RBI, and this pyramidal edifice has been possible due to the independence given to the governor under the RBI Act, 1934.However, for the last few years, the Union government has been making efforts to dilute the power of the RBI by distorting the independence of the central bank. Of course, in a way, some of the principles of central banking have been overlooked from the time the political administration started interfering in the appointments of the governor and the deputy governors of the central bank, approving the salaries and wages of RBI employees, and directing the monetary policy through distribution of bank credit by way of priority sector policy.But the move to restructure the monetary policy committee (MPC) marks the biggest dent yet in the independence of the RBI. Earlier, the governor used to appoint one member of the committee and had a say in two more. The remaining three members were appointed by the government. Now, the committee will be headed or chaired by the governor, who will only have a say in one appointment. One appointment will be done by the Reserve Bank Board from among the executive officers; one employee of the RBI will be nominated by the governor, while four persons will be appointed by the Centre. Moreover, the governor will not have veto powers, though he can exercise a tie-breaker vote in case of a tie.If the present draft is approved, the governor will find himself in an isolated situation. As regards the committee, its quality of discussion will be lowered since it is possible that the ruling parties today or in the future would like to appoint their own representatives as members of the MPC and not on the basis of merit.For instance, there can be a lot of liberal deficit financing with the pretext of increasing employment and economic growth. Moreover, where the governor is not strong, the varying opinions of different members of the MPC can impact the decision-making powers. However, this weakness can be removed by publishing individual policymakers’ views on the RBI’s website whenever the views are at odds with one another.In a central bank dominated by the government, the temptation to tamper with various instruments of monetary policy in order to achieve the government’s objectives would be hard to resist. For instance, the ministry of finance could want to reduce interest rate to push up demand, without considering the impact of rate cut on foreign inflows, depreciation of the rupee and increase in domestic money stock and inflation. There could be many more such examples.This situation can only be countered by having a robust governor with absolute independence in charge of the RBI. Of course, more independence has to be reconciled with more personal accountability on the part of the governor as well as that of other financial institutions. The governor should be responsible and accountable to Parliament and not to a particular government or the ministry of finance, or minister.The fears of a discretionary monetary policy adversely impacting the economy are not unfounded. There are a number of studies that have revealed that there is a reverse relationship between inflation and independence of the monetary authority; the higher the independence of the central bank, the lower the inflation. Giving higher discretionary powers to the central bank has been seen to be successful in many other countries.An apt title for the passage is:a)Govern the RBI Governorb)The Finance Minister is not the RBI Governorc)The importance of a strong RBI Governord)The importance of an independent RBICorrect answer is option 'D'. Can you explain this answer? in English & in Hindi are available as part of our courses for CAT. Download more important topics, notes, lectures and mock test series for CAT Exam by signing up for free.

Here you can find the meaning of DIRECTIONSfor the question (54 to 56):Read the passage and answer the question based on it.The Reserve Bank of India has worked as efficiently as any top central bank of the world right from its inception. It was blessed with absolute independence to control or manage monetary liquidity, price stability, exchange rate stability, and later on financial stability also. The governor and his team have ably served the nation during all the financial storms and crises, domestic as well as external, that beset the country.In the early, post-Independence period, the RBI is credited with monetisation of the entire economy by promoting and launching rapid branch expansion of commercial banks and the setting up of financial institutions such as the Industrial Finance Corporation of India (IFCI), the IDBI and co-operative banks, giant insurance companies and so on. Today’s strong financial system stands on the shoulders of the RBI, and this pyramidal edifice has been possible due to the independence given to the governor under the RBI Act, 1934.However, for the last few years, the Union government has been making efforts to dilute the power of the RBI by distorting the independence of the central bank. Of course, in a way, some of the principles of central banking have been overlooked from the time the political administration started interfering in the appointments of the governor and the deputy governors of the central bank, approving the salaries and wages of RBI employees, and directing the monetary policy through distribution of bank credit by way of priority sector policy.But the move to restructure the monetary policy committee (MPC) marks the biggest dent yet in the independence of the RBI. Earlier, the governor used to appoint one member of the committee and had a say in two more. The remaining three members were appointed by the government. Now, the committee will be headed or chaired by the governor, who will only have a say in one appointment. One appointment will be done by the Reserve Bank Board from among the executive officers; one employee of the RBI will be nominated by the governor, while four persons will be appointed by the Centre. Moreover, the governor will not have veto powers, though he can exercise a tie-breaker vote in case of a tie.If the present draft is approved, the governor will find himself in an isolated situation. As regards the committee, its quality of discussion will be lowered since it is possible that the ruling parties today or in the future would like to appoint their own representatives as members of the MPC and not on the basis of merit.For instance, there can be a lot of liberal deficit financing with the pretext of increasing employment and economic growth. Moreover, where the governor is not strong, the varying opinions of different members of the MPC can impact the decision-making powers. However, this weakness can be removed by publishing individual policymakers’ views on the RBI’s website whenever the views are at odds with one another.In a central bank dominated by the government, the temptation to tamper with various instruments of monetary policy in order to achieve the government’s objectives would be hard to resist. For instance, the ministry of finance could want to reduce interest rate to push up demand, without considering the impact of rate cut on foreign inflows, depreciation of the rupee and increase in domestic money stock and inflation. There could be many more such examples.This situation can only be countered by having a robust governor with absolute independence in charge of the RBI. Of course, more independence has to be reconciled with more personal accountability on the part of the governor as well as that of other financial institutions. The governor should be responsible and accountable to Parliament and not to a particular government or the ministry of finance, or minister.The fears of a discretionary monetary policy adversely impacting the economy are not unfounded. There are a number of studies that have revealed that there is a reverse relationship between inflation and independence of the monetary authority; the higher the independence of the central bank, the lower the inflation. Giving higher discretionary powers to the central bank has been seen to be successful in many other countries.An apt title for the passage is:a)Govern the RBI Governorb)The Finance Minister is not the RBI Governorc)The importance of a strong RBI Governord)The importance of an independent RBICorrect answer is option 'D'. Can you explain this answer? defined & explained in the simplest way possible. Besides giving the explanation of DIRECTIONSfor the question (54 to 56):Read the passage and answer the question based on it.The Reserve Bank of India has worked as efficiently as any top central bank of the world right from its inception. It was blessed with absolute independence to control or manage monetary liquidity, price stability, exchange rate stability, and later on financial stability also. The governor and his team have ably served the nation during all the financial storms and crises, domestic as well as external, that beset the country.In the early, post-Independence period, the RBI is credited with monetisation of the entire economy by promoting and launching rapid branch expansion of commercial banks and the setting up of financial institutions such as the Industrial Finance Corporation of India (IFCI), the IDBI and co-operative banks, giant insurance companies and so on. Today’s strong financial system stands on the shoulders of the RBI, and this pyramidal edifice has been possible due to the independence given to the governor under the RBI Act, 1934.However, for the last few years, the Union government has been making efforts to dilute the power of the RBI by distorting the independence of the central bank. Of course, in a way, some of the principles of central banking have been overlooked from the time the political administration started interfering in the appointments of the governor and the deputy governors of the central bank, approving the salaries and wages of RBI employees, and directing the monetary policy through distribution of bank credit by way of priority sector policy.But the move to restructure the monetary policy committee (MPC) marks the biggest dent yet in the independence of the RBI. Earlier, the governor used to appoint one member of the committee and had a say in two more. The remaining three members were appointed by the government. Now, the committee will be headed or chaired by the governor, who will only have a say in one appointment. One appointment will be done by the Reserve Bank Board from among the executive officers; one employee of the RBI will be nominated by the governor, while four persons will be appointed by the Centre. Moreover, the governor will not have veto powers, though he can exercise a tie-breaker vote in case of a tie.If the present draft is approved, the governor will find himself in an isolated situation. As regards the committee, its quality of discussion will be lowered since it is possible that the ruling parties today or in the future would like to appoint their own representatives as members of the MPC and not on the basis of merit.For instance, there can be a lot of liberal deficit financing with the pretext of increasing employment and economic growth. Moreover, where the governor is not strong, the varying opinions of different members of the MPC can impact the decision-making powers. However, this weakness can be removed by publishing individual policymakers’ views on the RBI’s website whenever the views are at odds with one another.In a central bank dominated by the government, the temptation to tamper with various instruments of monetary policy in order to achieve the government’s objectives would be hard to resist. For instance, the ministry of finance could want to reduce interest rate to push up demand, without considering the impact of rate cut on foreign inflows, depreciation of the rupee and increase in domestic money stock and inflation. There could be many more such examples.This situation can only be countered by having a robust governor with absolute independence in charge of the RBI. Of course, more independence has to be reconciled with more personal accountability on the part of the governor as well as that of other financial institutions. The governor should be responsible and accountable to Parliament and not to a particular government or the ministry of finance, or minister.The fears of a discretionary monetary policy adversely impacting the economy are not unfounded. There are a number of studies that have revealed that there is a reverse relationship between inflation and independence of the monetary authority; the higher the independence of the central bank, the lower the inflation. Giving higher discretionary powers to the central bank has been seen to be successful in many other countries.An apt title for the passage is:a)Govern the RBI Governorb)The Finance Minister is not the RBI Governorc)The importance of a strong RBI Governord)The importance of an independent RBICorrect answer is option 'D'. Can you explain this answer?, a detailed solution for DIRECTIONSfor the question (54 to 56):Read the passage and answer the question based on it.The Reserve Bank of India has worked as efficiently as any top central bank of the world right from its inception. It was blessed with absolute independence to control or manage monetary liquidity, price stability, exchange rate stability, and later on financial stability also. The governor and his team have ably served the nation during all the financial storms and crises, domestic as well as external, that beset the country.In the early, post-Independence period, the RBI is credited with monetisation of the entire economy by promoting and launching rapid branch expansion of commercial banks and the setting up of financial institutions such as the Industrial Finance Corporation of India (IFCI), the IDBI and co-operative banks, giant insurance companies and so on. Today’s strong financial system stands on the shoulders of the RBI, and this pyramidal edifice has been possible due to the independence given to the governor under the RBI Act, 1934.However, for the last few years, the Union government has been making efforts to dilute the power of the RBI by distorting the independence of the central bank. Of course, in a way, some of the principles of central banking have been overlooked from the time the political administration started interfering in the appointments of the governor and the deputy governors of the central bank, approving the salaries and wages of RBI employees, and directing the monetary policy through distribution of bank credit by way of priority sector policy.But the move to restructure the monetary policy committee (MPC) marks the biggest dent yet in the independence of the RBI. Earlier, the governor used to appoint one member of the committee and had a say in two more. The remaining three members were appointed by the government. Now, the committee will be headed or chaired by the governor, who will only have a say in one appointment. One appointment will be done by the Reserve Bank Board from among the executive officers; one employee of the RBI will be nominated by the governor, while four persons will be appointed by the Centre. Moreover, the governor will not have veto powers, though he can exercise a tie-breaker vote in case of a tie.If the present draft is approved, the governor will find himself in an isolated situation. As regards the committee, its quality of discussion will be lowered since it is possible that the ruling parties today or in the future would like to appoint their own representatives as members of the MPC and not on the basis of merit.For instance, there can be a lot of liberal deficit financing with the pretext of increasing employment and economic growth. Moreover, where the governor is not strong, the varying opinions of different members of the MPC can impact the decision-making powers. However, this weakness can be removed by publishing individual policymakers’ views on the RBI’s website whenever the views are at odds with one another.In a central bank dominated by the government, the temptation to tamper with various instruments of monetary policy in order to achieve the government’s objectives would be hard to resist. For instance, the ministry of finance could want to reduce interest rate to push up demand, without considering the impact of rate cut on foreign inflows, depreciation of the rupee and increase in domestic money stock and inflation. There could be many more such examples.This situation can only be countered by having a robust governor with absolute independence in charge of the RBI. Of course, more independence has to be reconciled with more personal accountability on the part of the governor as well as that of other financial institutions. The governor should be responsible and accountable to Parliament and not to a particular government or the ministry of finance, or minister.The fears of a discretionary monetary policy adversely impacting the economy are not unfounded. There are a number of studies that have revealed that there is a reverse relationship between inflation and independence of the monetary authority; the higher the independence of the central bank, the lower the inflation. Giving higher discretionary powers to the central bank has been seen to be successful in many other countries.An apt title for the passage is:a)Govern the RBI Governorb)The Finance Minister is not the RBI Governorc)The importance of a strong RBI Governord)The importance of an independent RBICorrect answer is option 'D'. Can you explain this answer? has been provided alongside types of DIRECTIONSfor the question (54 to 56):Read the passage and answer the question based on it.The Reserve Bank of India has worked as efficiently as any top central bank of the world right from its inception. It was blessed with absolute independence to control or manage monetary liquidity, price stability, exchange rate stability, and later on financial stability also. The governor and his team have ably served the nation during all the financial storms and crises, domestic as well as external, that beset the country.In the early, post-Independence period, the RBI is credited with monetisation of the entire economy by promoting and launching rapid branch expansion of commercial banks and the setting up of financial institutions such as the Industrial Finance Corporation of India (IFCI), the IDBI and co-operative banks, giant insurance companies and so on. Today’s strong financial system stands on the shoulders of the RBI, and this pyramidal edifice has been possible due to the independence given to the governor under the RBI Act, 1934.However, for the last few years, the Union government has been making efforts to dilute the power of the RBI by distorting the independence of the central bank. Of course, in a way, some of the principles of central banking have been overlooked from the time the political administration started interfering in the appointments of the governor and the deputy governors of the central bank, approving the salaries and wages of RBI employees, and directing the monetary policy through distribution of bank credit by way of priority sector policy.But the move to restructure the monetary policy committee (MPC) marks the biggest dent yet in the independence of the RBI. Earlier, the governor used to appoint one member of the committee and had a say in two more. The remaining three members were appointed by the government. Now, the committee will be headed or chaired by the governor, who will only have a say in one appointment. One appointment will be done by the Reserve Bank Board from among the executive officers; one employee of the RBI will be nominated by the governor, while four persons will be appointed by the Centre. Moreover, the governor will not have veto powers, though he can exercise a tie-breaker vote in case of a tie.If the present draft is approved, the governor will find himself in an isolated situation. As regards the committee, its quality of discussion will be lowered since it is possible that the ruling parties today or in the future would like to appoint their own representatives as members of the MPC and not on the basis of merit.For instance, there can be a lot of liberal deficit financing with the pretext of increasing employment and economic growth. Moreover, where the governor is not strong, the varying opinions of different members of the MPC can impact the decision-making powers. However, this weakness can be removed by publishing individual policymakers’ views on the RBI’s website whenever the views are at odds with one another.In a central bank dominated by the government, the temptation to tamper with various instruments of monetary policy in order to achieve the government’s objectives would be hard to resist. For instance, the ministry of finance could want to reduce interest rate to push up demand, without considering the impact of rate cut on foreign inflows, depreciation of the rupee and increase in domestic money stock and inflation. There could be many more such examples.This situation can only be countered by having a robust governor with absolute independence in charge of the RBI. Of course, more independence has to be reconciled with more personal accountability on the part of the governor as well as that of other financial institutions. The governor should be responsible and accountable to Parliament and not to a particular government or the ministry of finance, or minister.The fears of a discretionary monetary policy adversely impacting the economy are not unfounded. There are a number of studies that have revealed that there is a reverse relationship between inflation and independence of the monetary authority; the higher the independence of the central bank, the lower the inflation. Giving higher discretionary powers to the central bank has been seen to be successful in many other countries.An apt title for the passage is:a)Govern the RBI Governorb)The Finance Minister is not the RBI Governorc)The importance of a strong RBI Governord)The importance of an independent RBICorrect answer is option 'D'. Can you explain this answer? theory, EduRev gives you an ample number of questions to practice DIRECTIONSfor the question (54 to 56):Read the passage and answer the question based on it.The Reserve Bank of India has worked as efficiently as any top central bank of the world right from its inception. It was blessed with absolute independence to control or manage monetary liquidity, price stability, exchange rate stability, and later on financial stability also. The governor and his team have ably served the nation during all the financial storms and crises, domestic as well as external, that beset the country.In the early, post-Independence period, the RBI is credited with monetisation of the entire economy by promoting and launching rapid branch expansion of commercial banks and the setting up of financial institutions such as the Industrial Finance Corporation of India (IFCI), the IDBI and co-operative banks, giant insurance companies and so on. Today’s strong financial system stands on the shoulders of the RBI, and this pyramidal edifice has been possible due to the independence given to the governor under the RBI Act, 1934.However, for the last few years, the Union government has been making efforts to dilute the power of the RBI by distorting the independence of the central bank. Of course, in a way, some of the principles of central banking have been overlooked from the time the political administration started interfering in the appointments of the governor and the deputy governors of the central bank, approving the salaries and wages of RBI employees, and directing the monetary policy through distribution of bank credit by way of priority sector policy.But the move to restructure the monetary policy committee (MPC) marks the biggest dent yet in the independence of the RBI. Earlier, the governor used to appoint one member of the committee and had a say in two more. The remaining three members were appointed by the government. Now, the committee will be headed or chaired by the governor, who will only have a say in one appointment. One appointment will be done by the Reserve Bank Board from among the executive officers; one employee of the RBI will be nominated by the governor, while four persons will be appointed by the Centre. Moreover, the governor will not have veto powers, though he can exercise a tie-breaker vote in case of a tie.If the present draft is approved, the governor will find himself in an isolated situation. As regards the committee, its quality of discussion will be lowered since it is possible that the ruling parties today or in the future would like to appoint their own representatives as members of the MPC and not on the basis of merit.For instance, there can be a lot of liberal deficit financing with the pretext of increasing employment and economic growth. Moreover, where the governor is not strong, the varying opinions of different members of the MPC can impact the decision-making powers. However, this weakness can be removed by publishing individual policymakers’ views on the RBI’s website whenever the views are at odds with one another.In a central bank dominated by the government, the temptation to tamper with various instruments of monetary policy in order to achieve the government’s objectives would be hard to resist. For instance, the ministry of finance could want to reduce interest rate to push up demand, without considering the impact of rate cut on foreign inflows, depreciation of the rupee and increase in domestic money stock and inflation. There could be many more such examples.This situation can only be countered by having a robust governor with absolute independence in charge of the RBI. Of course, more independence has to be reconciled with more personal accountability on the part of the governor as well as that of other financial institutions. The governor should be responsible and accountable to Parliament and not to a particular government or the ministry of finance, or minister.The fears of a discretionary monetary policy adversely impacting the economy are not unfounded. There are a number of studies that have revealed that there is a reverse relationship between inflation and independence of the monetary authority; the higher the independence of the central bank, the lower the inflation. Giving higher discretionary powers to the central bank has been seen to be successful in many other countries.An apt title for the passage is:a)Govern the RBI Governorb)The Finance Minister is not the RBI Governorc)The importance of a strong RBI Governord)The importance of an independent RBICorrect answer is option 'D'. Can you explain this answer? tests, examples and also practice CAT tests.