The key protagonists of this drama – Garg, Acharya, and former RBI governor Urjit Patel – are no longer in office. Patel resigned in late 2018, followed by Acharya in mid-2019. Garg was transferred out of the finance ministry in July 2019, and he chose to resign rather than take up his new assignment as power secretary. The RBI-government relationship has improved considerably since then. RBI’s cash transfers to the government are now based on an indisputable formula framed by the Bimal Jalan committee.

However, the current ceasefire should not be mistaken for stability. There are a number of systemic and unresolved issues that complicate the RBI-government relationship. Unless these legacy issues are tackled in a constructive manner, this relationship will remain prone to periodic controversies.

The idea of an independent central bank for India “on a level of authority with the treasury” was first mooted during the British Raj by the economic genius John Maynard Keynes. Keynes’ proposal was dismissed by the Bank of England chief, Montagu Norman, who proclaimed “a Hindoo marriage” between the Bank of England (the dominant spouse) and RBI (the subservient wife).

“Norman’s graphic simile is… expressive of RBI’s real status after its creation,” former RBI economist Anand Chandavarkar wrote in a 2005 Economic and Political Weekly article. Among the pioneering economists who built up RBI’s research department, Chandavarkar felt that RBI enjoyed more autonomy during the British Raj than in independent India. As RBI assumed quasi-fiscal mandates in order to fulfil plan targets set by the powerful Planning Commission, it became an “emasculated fiscal agency”, he lamented.

Things changed with the liberalisation of the economy in 1991. Policymakers realised that an autonomous central bank would help instil confidence among foreign investors. A reformist RBI governor, C Rangarajan, and the then finance minister Manmohan Singh (himself a former RBI chief) reset the RBI-finance ministry relationship. The duo helped bring an end to the earlier practice of directly monetising government deficits by printing money. RBI got greater autonomy in shaping monetary policy even as government borrowing became more disciplined.

This period of bonhomie ended in the mid-2000s when the finance ministry and the Planning Commission began to see RBI as a roadblock to financial reforms. Delhi wanted RBI to liberalise capital flows to boost growth. RBI’s top brass in Mumbai demurred, pointing to the risk of excessive volatility. They were vindicated during the big financial meltdown of 2008. Even the International Monetary Fund (IMF) changed its tune on capital controls after that episode. Nonetheless, the relationship between the finance ministry and RBI remained under strain in the post-crisis years. The areas of disagreement ranged from regulation of State-owned banks to issues around accommodating the government’s large borrowing plans.

Since 2016, RBI has enjoyed operational independence to set short-term interest rates under the new monetary policy framework. Under this framework, the government sets the inflation target, and leaves it to the monetary policy committee led by the RBI governor to decide how best to meet that goal. In other areas, the demarcation of responsibilities is less clear-cut. RBI continues to be governed by an archaic Act that fails to address current concerns.

The RBI Act of 1934 followed a detailed report by the BN Mitra-led central banking enquiry committee of 1931. Nearly a century later, we could do with another such review to re-examine the role of the central bank in the modern economy. This would set the stage for a new RBI Act in tune with our times. As part of a grand bargain, the finance ministry must be prepared to shutter the department of financial services. Since this department runs State-owned banks, it effectively assumes the role of a de facto banking regulator, undermining RBI’s authority. RBI, in turn, must be prepared to cede public debt management to an independent entity. It must also adopt greater accountability and transparency measures in line with other large central banks of the world.

As a previous column (“Reimagining how the Reserve Bank functions”, January 10) argued, a new contract between RBI and the finance ministry, enshrined in a 21st century RBI Act, will burnish the credibility of both organs of the Indian State. A new law will not eliminate RBI-government conflicts. But it can reduce the scope of such conflicts.

Former RBI chief, YV Reddy, once quipped that he is very independent and has the permission of the finance minister to say so. A future RBI governor should be able to say that her autonomy is protected by law, and she does not require North Block’s permission to say so.

Pramit Bhattacharya is a Chennai-based journalist. The views expressed are personal