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Is the RBI Ready to Evolve? A New Model for India’s Central Banking System

by Onuraag Das   ·  September 8, 2023   ·  

As India aims to establish itself as an economic powerhouse on the world stage, the question has arisen: Is the RBI ready to evolve? To keep up with the rapidly changing landscape of India’s diverse and booming economy, the Reserve Bank of India (RBI) may have to restructure itself from being a centralized, monolithic entity to one that embraces a more decentralized approach, engaging stakeholders at multiple levels. This change aligns well with Prime Minister Modi’s vision of ‘minimum government, maximum governance,’ and could indeed be the evolution needed for the RBI to become a more dynamic and effective institution.

Challenging the Centralized Monolith: Is the RBI Ready to Evolve Through Decentralization and Stakeholder Involvement?

The Gandhian philosophy of political economy resists the concept of a monolithic, all-powerful central government, advocating instead for the power of local economies and decentralized governance. This notion has found contemporary relevance with leaders like Prime Minister Modi embracing the idea of ‘minimum government, maximum governance.’ In this context, the RBI’s current structure appears to be anachronistic. It remains a centralized monolith that has yet to fully adapt to the realities of India’s diverse political and economic landscape. 

The Concept of a Reserve Bank System

There is a growing sentiment among economists and policymakers that the RBI should move toward becoming a “Reserve Bank System,” similar to the American Federal Reserve System. This could involve dividing the RBI into regional Reserve Banks across India’s varied geographies. For instance, the four ‘local boards’ located in Delhi, Mumbai, Chennai, and Kolkata, as defined by the RBI Act, 1934, could evolve into four independent Reserve Banks. Each would have its own governor and management board, and these entities could even be partially owned by commercial and cooperative banks operating in their respective regions. 

Skin in the Game

One of the most compelling arguments for this kind of restructure is that it would give stakeholders actual ‘skin in the game.’ This stakeholder engagement would result in more democratic decision-making in terms of monetary management. A new Reserve Bank System Board could replace the Central Board, comprising the governors of each Reserve Bank, major commercial bank representatives, and government appointees. This would foster a more cooperative and dynamic governance structure, rather than a top-down, command-type setup that currently exists.

Challenges of a Centralised Monolith

The RBI, as it stands, often acts more like a government department than a dynamic, responsive institution. It wields enormous authority, often unchecked, and has been somewhat resistant to fundamental changes that could make it more responsive to the Indian economy’s diverse and complex needs. Moreover, its small balance sheet compared to other central banks around the world, maintained in the name of inflation control, has in fact stifled the Indian economy by contributing to some of the highest ‘costs of capital’ among peers.

Cooperative Governance and Decentralization

The idea of cooperative governance resonates well with India’s economic DNA, which inherently supports decentralization and democracy. The earlier attempts at decentralization by the erstwhile Planning Commission align well with this. Thus, transforming the RBI into a Reserve Bank System would be a natural extension of India’s democratic ethos and its commitment to decentralized governance.

Comparing Global Practices

While the Bank of England is almost entirely owned by the British government, the Bank of Japan has a different approach, with about 45% of its equity publicly traded. Although it might be a stretch to think that the Indian government would ever allow its central bank to follow the Japanese model, a new equity holding structure would nonetheless enable more dynamic operation. This would enable Indian central banking to function as a cooperative system rather than a monolithic entity.

With India aspiring to become one of the world’s top economies and cross the $25 trillion threshold by 2047, the RBI’s role as a monolithic, centralized body is increasingly called into question. Is the RBI ready to evolve into a decentralized institution, actively involving multiple stakeholders in the broader process of monetary management?


In conclusion, the need for the RBI to evolve could not be more pressing. Whether influenced by Gandhian philosophies or the realities of modern economics, India’s economic aspirations necessitate a dynamic, decentralized, and stakeholder-engaged Reserve Bank System. If India is to meet its lofty economic goals, perhaps it’s high time to ask: Is the RBI ready to evolve?

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