During the post-reform period, the relationship between the central bank and the government took a new turn through a welcome development in the supplemental agreement between the government and the RBI in September 1994 on the abolition of the ad hoc treasury bills to be made effective from April 1997.Another major area of discord between the RBI and the government in the late 1950s related to the financing of the cooperatives and the pattern of organisation of the lending agencies. While the problems experienced earlier by the RBI persisted to some extent, the change brought about a curious situation where the government became owner of a number of banks, but the supervision of these banks was, in turn, conducted by the RBI which was also owned by the government. The mid-fifties, however, did see the beginnings of serious erosion of autonomy in the monetary policy function due to the emergence of the system of ad hoc Treasury Bills and automatic monetisation.

The ad hoc Treasury Bills, which were meant to be temporary, gained a permanent as well as a cumulative character. Significant achievements in financial reforms including strengthening of the banking supervision capabilities of the RBI have enhanced its credibility and instrument independence.aspx?Id=88). In fact, this function could be in conflict with autonomy in the conduct of monetary policy.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. 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 third phase that changed the contour of this relationship started with the nationalisation of major banks in 1969. It may be of interest to note that currently, in the year 2001, these four areas are still on the top of RBI’s concerns. For example, the RBI did not approve of the substitution of financial planning by a kind of ‘physical planning’.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.Shortly after India’s independence in 1947, the RBI was nationalised in 1948. The fact that the China wholesale rubber seal strip rate of inflation was modest compared to other developing countries during this period is indicative of the success of macro-policy management and facilitated the task of the RBI in pursuing other developmental activities.On the basis of one of the criteria to measure the degree of independence of various central banks during the eighties, the RBI was ranked marginally below the median level of a list of about seventy countries (including twenty-one industrialised countries). In fact, threats were issued to supersede the Bank’s Board should it recommend monetary and exchange rate policies incompatible with the government’s scheme of actions.

The preamble of the Act focused on monetary stability and operations on currency and credit system in India. At the same time, with gradual opening up of the economy and development of domestic 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.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.rbi. As a result, the relationship between the central bank and the government took a new turn in many countries, resulting in the genesis of inflation targeting framework in a number of economies. The early years were characterised by a good degree of fiscal rectitude and harmony in monetary and fiscal policy with areas of potential conflict being minimal. This phase was charaterised by several features to indicate considerable influence or dominance of government over the RBI.