Economists who are fascinated with the monetary policy always argue for the independent functioning of the Central Banks in the countries.
Central bank independence typically has three layers:
- Operational independence – freedom to conduct monetary policy without government interference.
- Instrument independence – freedom to decide how to achieve goals (e.g., interest rates).
- Goal independence – central bank sets its own targets (rare; most governments set inflation target).
Most advanced economies give at least operational + instrument independence.
A brief summary of the global regions and the level of independence of their central Banks
| Region | Highly Independent | Moderately Independent | Low/Weak Independence |
| North America | USA, Canada | — | — |
| Europe | ECB, UK, Switzerland, Sweden, Norway | — | Russia (mixed) |
| Asia-Pacific | Japan, Australia, New Zealand | India, South Korea | China |
| Latin America | Chile | Brazil, Mexico | Argentina |
| Africa | — | South Africa | — |
Ownership of the Central Banks Globally
1. Fully government-owned
Most central banks are 100% owned by their national governments.
Examples include: Reserve Bank of India (RBI), Bank of England, Federal Reserve System (a special case—explained below), People’s Bank of China, Bangladesh Bank, Central Bank of Brazil, Bank of Russia.
2. Mixed ownership (government + private shareholders!)
Bank of Japan (BOJ)- ~55% owned by the Government of Japan, ~45% publicly traded shares. But private shareholders have no control over policy.
Swiss National Bank (SNB)
Owned by Swiss cantons (states), Cantonal banks, Public shareholders (the stock is listed on SIX exchange!). SNB is still fully independent in policy decisions.
US Federal Reserve System
The Fed’s structure sounds private, but it’s not. Regional Federal Reserve Banks have “member bank shares” These “shares” don’t give ownership control. Fed is effectively a public institution with a unique structure. “Member bank shares” are basically regulatory capital contributions — not ownership contributions.
Thus, most central banks are fully government-owned, but a few (like BOJ and SNB) allow private shareholders but they cannot influence monetary policy, cannot appoint governors, get very limited voting rights and receive capped or controlled dividends.
Reserve Bank of India
Based on the RBI Act, 1934, RBI was established and commenced its operations on 1st April, 1935 with a share capital of Rs. 5 Crores divided into shares of Rs. 100 each fully paid up. The entire share capital was owned by private shareholders. Its head office was in Calcutta and moved to Mumbai in 1937.Though originally privately owned, since nationalisation in 1949, the Reserve Bank is fully owned by the Government of India. The Central Board of RBI is appointed by the Government of India as per the RBI Act. RBIs full time official directors consist of Governor and not more than four Deputy Governors. Non- official Directors comprise 10 people nominated by Government from various fields and two government officials and four other directors (one each from four local boards).
The Economic Capital Framework (ECF) is the rule-book that RBI uses to decide how much money it must keep aside (as capital & buffers) for safety/risks — and how much surplus (profit) it can safely transfer to the Government. ECF was revised in 2019 (Bimal Jalan Committee) and accordingly capital/reserve of RBI is conceptually split into two broad parts (Contingency Risk Buffer and Economic Capital) with defined minimum thresholds. In 2025, RBI reviewed ECF (first 5-year review since 2019 adoption). The review reaffirmed the core structure but gave greater flexibility to adjust risk buffers annually depending on macroeconomic conditions and evolving global risks. The updated framework aims for smoother surplus transfers over time — avoiding “boom-and-bust” swings in transfer amounts, enabling the government better fiscal planning.
Consequent to the above changes to the ECF, the amount of transfer of funds from RBI to the Government in the form of annual dividends are as under:
| Year | Amount of dividend (INR Crs) |
| 2018-19 | 1,76,051* |
| 2019-20 | 57,128 |
| 2020-21 | 99,122 |
| 2021-22 | 30,307 |
| 2022-23 | 87,416 |
| 2023-24 | 2,10,874 |
| 2024-25 | 2,68,590 |
*The large 2018-19 figure (Rs.1,76,051 Crore) comprised the normal surplus for the year plus a one-off transfer of excess provisions identified under the revised Economic Capital Framework.
Top 10 Central Banks in terms of the reserves based on the latest available data for 2025:(https://www.digitalphablet.com/infotainment/top-10-largest-central-banks-by-reserves-worldwide/)
| Name of the Central Bank | Amount of reserves (in Dollars) |
| Peoples Bank of China | 4.2 Trillion |
| Federal Reserve System ,USA | 3.9 Trillion |
| Bank of Japan | 1.4 Trillion |
| European Central Bank | 940 Billion |
| Swiss National Bank | 900 Billion |
| Hongkong Monetary Authority | 890 Billion |
| People’s Bank of Russia | 650 Billion |
| Reserve Bank of India | 600 Billion |
| Saudi Central Bank | 580 Billion |
| Singapore’ Monetary Authority | 570 Billion |
Though the RBI has been sharing with the Union Government higher amounts of dividend since 2019, the overall reserves position of RBI is more than satisfactory and RBI is in the list of the top 10 Central Banks in terms of the reserves.
Monetary Policy Committee of RBI
Monetary Policy Committee (MPC) of the Reserve Bank of India is constituted under the RBI Act, 1934. It includes three members from the RBI and three members nominated by the Central Government. The Governor of RBI serves as the Chairperson. Earlier, the RBI Governor used to take the final decisions, after consultations with Deputy Governors, Executive Directors, and an advisory TAC, but without a formal, voting-based MPC. To make the process more transparent and balanced, the Monetary Policy Committee was formed in 2016. The main goal of the RBI Monetary Policy Committee (MPC) is to keep India’s economy stable and growing. The Monetary Policy Committee is entrusted with the task of fixing the benchmark policy rate (repo rate) required to contain inflation within the specified target level. The amended RBI Act in 2016 also provides for the inflation target to be set by the Union Government in consultation with the RBI, once in every five years.
ECF is a welcome move since it brings consistency in the dividend declaration policy of RBI. Though, critics point out that the Union government is milching the RBI by squeezing it for more dividends, one can say that there is a mechanism now in place that is more transparent removing the ad hocism that was there earlier in the declaration of the dividends. Similarly, MPC framed in 2016 is expected to bring greater cohesion and better coordination between MOF and RBI since fiscal policy and monetary policy are nothing but two sides of the same coin. Nevertheless, the current MPC mechanism gives room for criticism that the Union Government is able to bulldoze the RBI and influence its Monetary Policy through the three nominated members of the government in the Committee. Having said that one must admit that the MPC is now target driven with well-defined goals and objectives.
Whereas, the appointment of directors to the Central Board of RBI is one area where there is a need to bring in some reform. The primary functions of the Central Board of RBI include General superintendence and direction of the Bank’s affairs. RBI is responsible for the regulatory supervision of the financial sector (that includes both banking and non-banking financial sectors) and in the recent past we have seen banks and NBFCs like- PMC Bank, Yes Bank, ILFS, Devan Housing Finance Corporation getting into deep problems and violation of accounting standards by Indus Ind Bank wherein the derivative losses had been camouflaged. This raise concerns on the quality of regulatory supervision in the financial sector. RBI and SEBI have to take their own share of blame for the lapses in regulatory supervision in the above-mentioned episodes. Bharat follows a non-mandatory consultation approach which means that the regulatory bodies have the discretion to engage themselves in consultation with each other or not. Many a times, this results in regulatory vacuum when the multiple regulators do not initiate action on their own and refrain from consultation with one another. Therefore, there is a need for removing this regulatory vacuum by bringing suitable legislation/ amendment to existing Acts, making consultative approach among the multiple regulators as mandatory. This will remove the jurisdictional tussle whenever there are multiple sectoral regulators involved like e.g., RBI, SEBI and on the other hand a non-sectoral regulator for example; CCI (Competition Commission of India).
It may be recalled that post PNB fraud in 2018 the then RBI Governor Urjit Patel said that RBI has better regulatory control over private sector banks while PSBs look up to the finance ministry. He further said that the weak legal framework over PSBs deters the RBI from exercising better control over PSBs. In other words, government continues to both own and exert significant influence over PSBs, meaning the “arm’s length” distance remains partial. To address this issue the Nayak Committee (2014) had set out a phased process: Phase 1 transfer government’s ownership in PSBs to Bank Investment Company (BIC); Phase 2 empower boards; Phase 3 let boards fully assume ownership functions. Unfortunately, the BIC is nowhere in the picture yet.
According to various news reports the Union government is now mulling another consolidation plan in public banking sector by merging several small lenders with large public sector banks. If the government does not put the BIC is place at least by now, post consolidation few PSBs may not only become big banks but also become big monsters, making it very difficult for RBI to rein in.
As per the Union government’s disclosure in the Parliament the scheduled commercial banks (SCBs) in the country have written off bad loans (non-performing assets—NPAs) worth a staggering Rs16.35 lakh Crore over the past decade (2014-2024). Whereas, only Rs 2,69,795 Crore of this amount has been recovered (up to September, 30, 2024).
As of March, 2014 there were about 5,090 wilful defaulters in the banking sector with outstanding amount about Rs. 39,504 Crore, whereas, as of March, 2025 the same stood at 1,629 and Rs. 1.62 lakh Crores, respectively.
Post liberalisation the thin veil between the political and corporate sectors has totally vanished and it is a known fact that the corporates are able to exercise greater influence on the politicians and the ruling parties and manage to not only default in the repayment of the bank loans but also get away scot free and even run away to other countries. In this context it may be recalled that in April, 2015 the then RBI Governor Dr. Raghuram Rajan had red flagged “a list of high profile fraud cases of non-performing assets to the Prime Minister’s Office for coordinated investigation” but there was no swift action or response from the government.
Unless the RBI is fully empowered to address the above issues, the banks, mainly the PSBs get away taking shelter under the government’s umbrella as rightly pointed out by Urjit Patel. To address this issue, the Union government not only has to maintain arm’s length” from the PSBs by creating a BIC, there is also a compelling case for maintaining arm’s length from the RBIs role of General superintendence and direction of the Bank’s affairs. This requires a setup similar to BIC in the appointment of Non- official Directors (other than two government officials to the Central Board of RBI.
Let us hope that the regulator and the Union Government will collectively address these issues by having dialogue and serious discussions.
