Oxford Analytica (OA), in its 2006 report on Monetary Policy Transparency in India, upgraded India's compliance with the International Monetary Fund's (IMF) Monetary Transparency Code to "Compliance in Progress." According to OA, in 2006, the Reserve Bank of India (RBI) institutionalized various changes that had already been under way in the area of its operations and responsibilities. This has contributed to greater clarity of roles and responsibilities of the RBI and thereby increased transparency. The RBI Act of 1934 was amended in 2006 to increase monetary policy flexibility. The RBI already provides a range of publications on monetary policy. A Technical Advisory Committee (TAC) for Monetary Policy, set up in 2005, has continued to discuss policy for the quarter ahead as a preparatory step towards a monetary policy committee. OA notes in its 2006 report that in July 2006, a committee appointed by the RBI released a roadmap towards fuller capital account convertibility, which recommended greater monetary policy transparency. Many of its recommendations would require more operational independence for the central bank. The RBI is studying the report, but, according to OA, there are no proposals at present to provide it with greater statutory autonomy.

General Overview

According to Oxford Analytica's (OA) 2006 report on Monetary Policy Transparency in India, during 2006, the Reserve Bank of India (RBI) institutionalized a number of changes that were already underway in its operations and responsibilities. These steps have contributed to a more transparent institutional framework for monetary policy by clarifying the roles and responsibilities of the central bank. As prescribed by the Fiscal Responsibility and Budget Management Act (FRMB), since April 2006 the RBI has not participated in the primary market for government securities. The central bank continues to provide ways and means to provide advances to the centre and states to meet any temporary mismatches in their cash flow. The arrangements for these advances were revised during 2006. (OA 2006, p. 146)

OA explains that further changes in 2006 involved the enabling of operational efficiency and a clearer division of responsibilities within the RBI, through the separation of policy departments from bank operations. A new Financial Markets Department (FMD) was set up within the Reserve Bank in July 2005, and from January 2006 all Reserve Bank operations in financial markets have been integrated in the FMD. The Reserve Bank of India Act, 1934 was amended in 2006 to allow for increased monetary policy flexibility by freeing up liquidity, most notably by removing floor and ceiling rates for the Cash Reserve Ratio (CRR). The legislation also clarifies definitions of the repo and reverse repo interest rates and provides a legal basis for trading in derivatives. In July 2006, a committee appointed by the RBI released a 'roadmap' towards fuller capital account convertibility. The report outlined a number of preconditions for further opening of India's capital account, and discussed prescriptions for monetary policy transparency including greater autonomy for monetary policy and instrument independence, inflation targets, the institution of a monetary policy committee and publication of its minutes. The central bank is in the process of studying these proposals. The report stops short of recommending greater statutory autonomy for the RBI. (OA 2006, p. 146)

Furthermore, the Technical Advisory Committee (TAC) for Monetary Policy, set up in 2005, has continued to discuss policy for the quarter ahead as a step towards a monetary policy committee. The RBI also now issues two quarterly publications in addition to its mid-year and annual reports. The RBI does not plan to introduce inflation targets in the near future. (OA 2006, p. 146)

The 2005 OA report on Monetary Policy Transparency in India noted that the RBI completed a progress review on the implementation of the recommendations of the report of the 11 Advisory/Technical Groups constituted by the Standing Committee on International Financial Standards and Codes. The report has been considered by a panel of advisers, and a draft report was placed in the public domain in December 2004. (OA 2005, p. 137)

The report has made specific recommendations against the backdrop of the Code of Good Practices in Monetary and Financial Policies adopted by the International Monetary Fund (IMF). It noted that the RBI policies and operations largely conformed to the IMF Code. The Group suggested, however, greater transparency in the policy formulation process and on institutionalizing the process of communicating the policy, albeit on a post facto basis. It had made recommendations concerning constitutional and legislative issues that covered instrument independence with monetary policy goal being prescribed by the Government after due Parliamentary deliberations. (RBI 2005, p. 29)

Some recommendations of the Advisory Group regarding monetary policy formulation procedures would require enabling legislative changes and could be considered by the Government with necessary political consultations as part of the democratic process. Monetary policy formulation at present is being undertaken by the management of the Bank supported by a consultative process. Several initiatives have been taken by the central bank to enhance the transparency in monetary and financial policies through institutionalized consultative process. The Monetary Policy Department of the Bank organizes annual Resource Management Discussions between the top management of the central bank and some commercial banks. It also holds monthly meetings with select major banks and financial institutions, which provide a consultative platform for issues concerning monetary, credit, regulatory and supervisory policies of the central bank. Decisions on day-to-day money market operations, including supply of liquidity, are taken by the Financial Markets Committee (FMC), which includes senior officials of the central bank responsible for monetary policy and operations. (RBI 2005, p. 32)

In the 2006 Article IV consultations between India and the IMF, IMF staff noted that while inflation remained contained, price pressures could emerge. Monetary aggregates are expanding at rates well above RBI indicative projections, while real interest rates remain low from a historical and cross-country perspective. In addition, while tightening in risk weights and provisioning standards has eased the credit expansion, growth in the new mortgage, retail, and commercial real estate lending segments remains strong. The RBI's stance of continued gradual removal of monetary accommodation, going forward, would provide insurance against a possible inflation overshoot. This strategy would anchor inflation expectations and moderate the credit expansion by raising the cost of funds. (IMF 2007, p. 16)

According to IMF staff, the RBI remained vigilant, particularly in light of sustained rapid growth in monetary and credit aggregates and elevated asset prices. However, a calibrated response was needed to avoid an adverse impact on the investment needed to sustain current growth rates. Given low inflation, lack of conclusive evidence of overheating, and lagged effects of earlier rate increases that had yet to feed through the system, the RBI preferred to closely monitor evolving macroeconomic developments. After the staff mission, at its end-October mid-year review of monetary policy, the RBI raised the rate at which it injects liquidity by 25 bps to 71/4 percent but left unchanged the rate at which it absorbs liquidity at 6 percent. (IMF 2007, p. 20)

The immediate challenge is managing the near-term risk of inflationary pressures. The increases in rates implemented over the past year and the RBI's continued vigilance are welcome. The central bank's stance of continued gradual removal of monetary accommodation is appropriate and going forward would provide insurance against a possible inflation overshoot. Overperformance on the 2006/07 budget, by channeling the anticipated revenue windfall to deficit reduction, would support this stance while contributing toward medium-term fiscal consolidation. (IMF 2007, p. 29)

IMF staff acknowledged that the current exchange rate arrangement remains appropriate. Competitiveness appears adequate. As the capital account opens further, the current policy will continue to promote flexibility, preserve monetary policy independence, and give the private sector incentives to manage currency exposures. (IMF 2007, p. 29)

The Principles

Clarity of roles, responsibilities and objectives of central banks.

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Oxford Analytica (OA), in its 2006 report on Monetary Policy Transparency in India, upgraded India's compliance with this principle to "Compliance in Progress."

The report elaborates that the Reserve Bank of India Act (RBI Act) of 1934 specifies that the bank's main objective is monetary stability. Implicitly, the bank achieves this objective via price stability and economic growth. In the absence of a legally enshrined mandate for the central bank, the Ministry of Finance (MoF) and the Reserve Bank of India (RBI) jointly set annual monetary policy objectives, which the RBI then implements. Although not based on a formal arrangement, this regime allows the central bank to set monetary policy objectives as it deems necessary, while the government also plays a part in setting monetary objectives and exchange rate policy. (OA 2006, p. 147)

The RBI Act entrusts the RBI with the core tasks of issuing bank notes, managing reserves to ensure monetary stability, and operating the currency and credit system. It also charges the RBI with responsibility for managing the accounts of the central government (and individual states under separate agreements); managing public debt, regulating and supervising commercial banks and non-banking financial intermediaries; managing foreign exchange; and formulating and implementing monetary policy. However, it is the government that sets the exchange rate. The RBI Act implicitly gives the RBI the authority to use monetary policy instruments to attain its policy objectives. (OA 2005, p. 137)

According to the 2005 OA report, there is some concern over possible conflicts of interest between ownership and regulation, which is leading to a clearer definition of the regulatory role of the RBI. Accordingly, the RBI recently decided to constitute a working group on avoidance of conflicts of interest, tasking it with identifying the sources and nature of potential conflicts of interest and the international and domestic practices to mitigate this. More generally, the RBI is currently aiming to 'increase the operational efficacy of monetary policy, redefine the regulatory role of the RBI, strengthen prudential norms and develop the technological and institutional infrastructure.' (OA 2005, p. 137)

The RBI is not formally independent of the government. However, it has considerable operational autonomy, which reflects the high priority both the ministry of finance and the RBI attach to controlling inflation. While the central government's automatic access to subsidized RBI financing has ended, and the reliance on RBI financing by the central government has diminished over recent years, there are no formal limits on overall RBI lending to government. This leaves the RBI free to purchase government securities that are not sold to banks and public financial institutions under the central government market borrowing program, and to subsequently sell them through open market operations as part of its monetary and public debt management. The central government also has access to ways and means advances from the RBI. There are separate limits for the first and second halves of the fiscal year, and utilization of 75 percent of available advances triggers the flotation of additional government securities. Weekly information on RBI transactions in government securities is published on the RBI. The RBI no longer provides exchange rate or other guarantees. Finally, the RBI makes an agreed profit transfer to the central government each year. (IMF 2001)

In 1999, the RBI set up an advisory group to review transparency in monetary and financial policies. The group made several recommendations for adapting the formal monetary policy-making framework to international standards, including: granting a single, legally enshrined mandate to the RBI; greater operational flexibility for the conduct of monetary policy; clear demarcation of responsibilities and accountability; and a legal obligation to seek parliamentary approval for annual monetary policy objectives. The RBI accepted some of these suggestions and submitted an RBI Amendment Bill to parliament in 2001 to amend the central bank law accordingly. This should be passed in the next winter session of parliament. However, the decoupling of debt management and monetary policy remain core objectives. (OA 2005, pp. 137-138)

The RBI is permitted to extend loans and advances to the central government and state governments, provided that such advances are repaid within three months. In addition to lending to commercial and state cooperative banks, the RBI may also grant loans and advances to local authorities, state financial corporations, the Industrial Development Bank, the Reconstruction Bank, and a host of public financial institutions affiliated to the government, provided that such loans are repaid within six months. Consolidated data on such loans are included in the weekly summary financial statements, and the monthly, quarterly, and annual balance sheets that the RBI publishes on its website. (OA 2005, p. 138)

As a result of the Fiscal Responsibility and Budget Management (FRBM) Act, the government is no longer allowed to borrow from or maintain an overdraft with the RBI from 2005-06. The RBI is also working on improving full disclosure of information concerning government guarantees. Contingent liabilities are already explicitly stated in the budget. There is fairly widespread confidence that the provisions of the FRBM Act provide a solid foundation for consolidation and achievement of existing monetary policy objectives. (OA 2005, p. 138)

The RBI's involvement in the rest of the economy is clearly proscribed by the RBI Act. The RBI cannot engage in trade or otherwise have a direct interest in commercial enterprises, and is banned from acquiring shares in banks and corporations. The RBI has been reducing its financial stake in some of the financial institutions it regulates since 2002, and it now has zero holding in the Securities Trading Corporation of India and less than a 60% stake in the State Bank of India. (OA 2005, p. 138)

The RBI is required by the RBI Act to pay its profits to the central government after making provisions for non-performing loans, the depreciation of assets, staff salaries and other obligations. Such obligations include an annual contribution of such amounts as the RBI considers necessary to the National Rural Credit Fund and the National Rural Credit Stabilization Fund. In this capacity, the RBI undertakes quasi-fiscal development functions on behalf of the government. These contributions are listed as non-tax revenue in the budget. (OA 2005, p. 138)

The RBI manages the internal debt and accounts of the central and state governments, regulates foreign exchange transactions in India, performs quasi-fiscal development functions, and regulates the securities market. As the government's debt manager, the RBI was previously allowed to participate in the primary market for government securities. However, the Fiscal Responsibility and Budget Management Act prohibits direct borrowing by the central government from the Reserve Bank starting in the fiscal year 2006-07, except by way of Ways and Means Allowances to meet temporary mismatches in receipts and payment, or under exceptional circumstances. The RBI may, however, buy or sell central government securities in the secondary market. With the aim of adding to transparency and stability in the debt market, the RBI began to announce a calendar for issuing government debt in 2002. (OA 2005, pp. 138-139)

In addition to managing the government debt, the RBI regulates the government securities market. The government has established a separate Clearing Corporation of India Limited (CCIL) to improve the clearing and settlement of transactions in government securities. The CCIL received positive marks in a recent internal review. The CCIL has been given approval in principle for implementation of a clearing arrangement for OTC derivatives and guidelines are being framed. The CCIL has already developed pricing and risk models for this process, and the clearing arrangement is expected to be in operation in the near future. (OA 2005, p. 139)

Open process for formulating and reporting monetary policy decisions.

EN

Oxford Analytica (OA), in its 2006 report on Monetary Policy Transparency in India, rated India's compliance with this principle as "Enacted." From the mid-1980s until 1998, the Reserve Bank of India (RBI) used a monetary-targeting framework focused on interest rates, while at the same time monitoring developments in the real sector. Since 1998, it has widened the framework and begun to pursue a multiple-indicator approach. In addition to monitoring interest rates, the RBI now considers indicators such as currency movements, the exchange rate, the inflation rate, capital flows, trade, the fiscal position, and movements in credit. This widening of the scope of variables monitored has encouraged the RBI to develop a more sophisticated econometric model that focuses on short-term movements in the components of reserve money. (OA 2006, p. 150)

The 2006 OA report further notes that a report of the Committee on Fuller Capital Account Convertibility at the RBI emphasized the importance of inflation targets. The RBI is looking into its recommendations, but current thinking within the central bank is that the dual objectives of price stability and economic growth are more suited to India. The RBI emphasized that fiscal policy (such as customs and excise taxes) also plays a role in price stability. At present, the RBI uses the Wholesale Price Index (WPI) as its main inflation indicator, although the WPI does not include services, which make up more than 50% of GDP. A more comprehensive price index would have to be developed before inflation targeting could be introduced. Commentators noted that for the RBI to introduce inflation targeting, it needs monetary policy independence as well as increased transparency overall. At present, given that the RBI is under the executive control of the Ministry of Finance, the situation is one where the Finance Minister makes comments about the appropriate level of interest rates. Without independence, the RBI may lose credibility if its attempts to target inflation do not succeed. (OA 2006, p. 150)

However, as noted in a 2005 Article in the International Herald Tribune, two innocuous press statements in July of 2005 provided ample clues that central banking in India may be heading for a transformation. The makeover will probably lead to inflation targeting - a system under which the government's control over monetary policy is limited to giving the Reserve Bank of India a price objective. The Indian central bank governor, said in a February 2005 speech: "The prerequisites for inflation targeting include a considerable degree of operational autonomy or independence" for the "central bank, flexible exchange rate conditions, well-developed financial markets and absence of fiscal dominance." All four elements are slowly falling into place. As far as fiscal dominance is concerned, India now has a law that requires the government to pare its budget deficit. (Mukherjee 2005)

The 2005 OA report notes that two important revisions were made to the RBI's main monetary policy instruments in 2004. Firstly, the LAF was revised in March 2004 on the basis of recommendations by the RBI's Internal Group on LAF. These revisions de-emphasize the sterilization role played by the LAF in order to allow it to emerge as the exclusive policy-signaling rate. Secondly, following the recommendations of the RBI's Working Group on the Instruments of Sterilization, the Market Stabilization Scheme (MSS) was introduced in April 2004 to strengthen the RBI's ability to conduct monetary policy and manage the exchange rate. Under the scheme, Treasury Bills and dated securities are issued to conduct sterilization operations. Essentially, the MSS now occupies much of the sterilization role formerly played single-handedly by the LAF. (OA 2005, pp. 140-141)

The Central Board of Directors is the highest executive organ of the RBI. The board consists of the governor, four deputy governors, fourteen directors, and a government representative (usually from the Ministry of Finance), all appointed by the government. Membership of the board is listed in the RBI's Annual Report and on the RBI's website. The board is required to meet at least six times a year, and at least once in each quarter. However, the committee of the Central Board (which includes the governor, deputy governors, and a number of directors) meets every week to review monetary, economic, and financial conditions and to advise the board on policy action. Much of the data used by this committee is released to the public within a week of the board's meeting. (OA 2005, p. 141)

An advisory group has recommended the formalization of the committee of the Central Board into a permanent Monetary Policy Committee (MPC). In practice, however, the committee already performs the tasks of an MPC and the RBI does not see an immediate need for this institutional change. Similarly, it does not consider it necessary to amend the RBI Act to provide institutional guarantees against the arbitrary removal of top management officers, as the government has never interfered in the running of the RBI for political reasons. According to RBI officials, the International Monetary Fund (IMF) does not see the creation of a Monetary Policy Committee as a strictly necessary reform. However, since the start of this fiscal year, a technical advisory committee (consisting of the governor, the deputy governor and four independent individuals) has been meeting more or less every quarter to discuss monetary policy for the next quarter. Their advice is then passed on to the central bank board for their meetings. Although informal, this is a step towards a monetary policy committee. However, the RBI does not publish an advance meeting schedule of the committee of the Central Board. (OA 2005, p. 141)

The RBI maintains an informative daily press release service on its website and publishes notifications on new regulations on a regular basis. These documents shed some light on the considerations that prompted policy action. The Central Board of Directors meets twice yearly and the approximate timing of meetings is known to policy-makers and investors, even if the exact date is not published in advance. The conditions by which monetary policy is made are also made relatively transparent via a series of statements, documents and speeches. The advisory group has recommended the publication of the minutes of board meetings and the release of voting records at a later stage. While the RBI recognizes that its explanation of monetary policy to the public could be improved, it has not made a decision on the changes proposed by the advisory group. (OA 1005, p. 141)

The RBI issues three major monetary policy statements each year: the governor's annual Statement on Monetary and Credit Policy, issued in April, a Mid-term Review of Monetary and Credit Policy, published in October, and a Quarterly Review. The RBI also publishes a Report on Trends and Progress in Banking, which is submitted to the Ministry of Finance (MoF) in November each year. The governor's annual Statement on Monetary and Credit Policy contains a detailed sectoral review of macroeconomic and monetary policy developments in the previous fiscal year and an assessment of the prospects for monetary (and fiscal) policy in the upcoming year. The Mid-term Review presents a similar review for the first half and an outlook statement for the second half of the fiscal year. Both documents, as well as an advance calendar of the exact disclosure dates, are published on the RBI website. The Annual Report of the RBI summarizes these two statements and explains the rationale for, and instruments used in, the RBI's monetary and credit operations during the reference year. (OA 2005, p. 142)

OA (2005) reports that the RBI has begun to hold consultations with academics, market participants, and financial intermediaries through various ad hoc committees in order to develop the efficiency of monetary policy. Periodic consultations with the MoF are employed to coordinate the overall economic policy framework and to improve banking sector surveillance and regulation. The RBI also conducts frequent resource management discussions with commercial banks. (OA 2005, p. 142)

Under the RBI Act, the RBI is obliged to publish a consolidated statement showing the aggregate liabilities and assets of all banks that fall under its supervision, based on the financial statements and credit information submitted to it. The Act also empowers the RBI to employ such measures as it deems necessary to collect the required information. Such information may include financial statements, and data on capital, reserves, liabilities, investments, and the terms of loans provided. However, the RBI is prohibited from disclosing confidential information to the public. (OA 2005, p. 142)

The advisory group has criticized this aspect of the supervisory function of the RBI and pointed out that the disclosure of supervisory information, such as the imposition of penalties, could be employed as a useful instrument for market discipline. In response to this criticism, and given the added emphasis of the Basel II rules on market discipline, the RBI advised all banks in October 2004 that all cases of penalty imposed by RBI and also strictures or directions on specific matters will be placed in the public domain. (OA 2005, p. 142)

Furthermore, such information may be necessary in the light of the poor disclosure practices of Indian banks. While it is unlikely that the RBI Act will be amended to allow for the disclosure of confidential banking information, the RBI has recently adopted a new prompt corrective action framework to deal with banks experiencing problems of capital adequacy, asset quality or profitability. Moreover, the RBI has also called for the establishment of a new supervisory body to oversee India's troubled Urban Co-operative Banks (UCBs). A Standing Advisory Committee on UCBs has been formed, and a 'vision' document for the future of UCBs, including issues of regulation and supervision, has been drafted. On the basis of feedback from this document, a medium-term framework for UCBs is being developed. UCBs are subject to dual control by the RBI and state governments and the vision document envisages harmonization of their approaches for facilitating the development of the sector. The RBI has signed Memoranda of Understanding (MoUs) with three state governments, and is in the process of entering MoUs with other states which have a sizeable number of UCBs. The MoUs envisage the drawing up of an action plan through state level Task Forces on UCBs for revival of weak UCBs. It provides for a structured arrangement for coordination and consultation as well as the professional management of UCBs. (OA 2005, p. 142-143)

Public availability of information on monetary policy.

CP

Oxford Analytica (OA) in its 2006 report on Monetary Policy Transparency in India, rated India's compliance with this principle as "Compliance in Progress." As a subscriber to the International Monetary Fund (IMF) Special Data Dissemination Standard (SDDS) since 2001, India provides a range of macroeconomic, financial, and monetary statistics. Within this framework, the Reserve Bank of India (RBI) is responsible for the provision of financial data, such as the analytical accounts of the banking sector, the analytical accounts of the central bank, interest rates, the balance of payments, international reserves and foreign currency liquidity, and exchange rates. It also disseminates data on two stock market indices on behalf of the Bombay and National Stock Exchange. The government meets the specifications for coverage, periodicity, and timeliness in all data categories with two exceptions. The first is timeliness of data on general government operations, for which it takes a flexibility option, and the second is the periodicity and timeliness for the labor market, for which it takes 'as relevant' flexibility options. (OA 2006, p. 153)

As part of its SDDS commitment, the RBI publishes a summary balance sheet in its weekly RBI Bulletin. The monthly RBI Bulletin disseminates detailed time series data on the RBI balance sheet, including weekly data for the reference month, monthly data for the four months preceding the reference month, and annual data for the three fiscal years preceding the current fiscal year. The RBI's Annual Report publishes data and commentary for the reference fiscal year on the annual balance sheet of the RBI and detailed data on reserve money on a financial year basis. The annual Handbook of Statistics on the Indian Economy publishes time series data on the components and sources of reserve money. Moreover, the RBI publishes daily information on money market operations, showing the volume of transactions by banks, primary dealers, and non-bank institutions, daily average interest rates, the status of the liquidity adjustment facility, and the net purchases and sales of the RBI made in connection with its open market operations. (OA 2006, p. 153)

The RBI Act empowers the RBI to extend emergency financial support to Indian commercial banks and financial institutions if 'a special occasion has arisen making it necessary or expedient that action should be taken for the purpose of regulating credit.' However, the Act does not specify the terms of emergency loans and advances granted to distressed banks, nor does it require the RBI to disclose details of emergency actions to the public. The RBI indicates that it has not used these powers since 1992. The RBI last acted as lender of last resort for the Global Trust Bank in July 2004, providing emergency liquidity that successfully prevented the banks from collapsing. Global Trust Bank's balance sheet was restructured and the bank merged with a public-sector bank, the Oriental Bank of Commerce. (OA 2005, p. 145)

According to OA, the RBI has established and maintains a high-quality public information service through its website. The site provides a comprehensive, user-friendly publications program consisting of reports, statistics, primers, press releases, and working papers on a variety of macroeconomic, monetary, and financial issues. Relative to other countries, the RBI releases a substantial amount of information. Regular publications are classified by frequency of publication under weekly, monthly, quarterly, annual, and occasional headings. Reports of RBI committees as well as speeches and lectures by senior RBI officials are also available on the RBI website. (OA 2005, p. 145)

Accountability and assurances of integrity by the central bank.

CP

Oxford Analytica (OA), in its 2006 report on Monetary Policy Transparency in India, rated India's compliance with this principle as "Compliance in Progress." Under the constitution and the Reserve Bank of India (RBI) Act, the RBI must submit its Annual Report to the Ministry of Finance (MoF), which then submits it to parliament. RBI officials are generally summoned before parliamentary committees in cases that have a direct bearing on the operations of the RBI. Under the 1949 Banking Regulation Act, the RBI must also submit its Report on Trends and Progress in Banking to parliament and to the MoF each November. This report summarizes the activities of the central bank as banking regulator and supervisor, and is publicly available. (OA 2006, p. 155)

According to the 2005 OA report, the central bank is required by the RBI Act to submit to the government its audited final accounts and a report on its yearly activities within two months of the end of the fiscal year. This report is published on the central bank website as part of the RBI Annual Report. The RBI Act commits the government to publish the RBI's audited annual financial statement in the Gazette of India. (OA 2005, p. 146)

The external auditors of the central bank are appointed by the government to examine and report on the RBI balance sheet and financial accounts. While other government agencies are audited by the Comptroller and Auditor General of India (CAG), the accounts of the RBI are audited by private accounting firms on a rotating basis. The RBI also carries out a regular Management Audit and Systems Inspection, which focuses on internal compliance with prescribed systems and procedures and evaluates efficiency and economy in operations. (OA 2005, p. 146)

The RBI Act has clear provisions on potential conflicts of interest for employees, according to the 2005 OA report. RBI staff cannot be simultaneously employed by the RBI and private banks, and they must renounce their directorial functions in private banks prior to joining the RBI. The RBI also publishes staff regulations stating that bank employees must not seek or accept outside employment without the RBI's permission, or accept gifts, engage in commercial business, or speculate in securities. Transactions in real estate also require the consent of the RBI. Officials must report the employment of their children by any financial institution the RBI regulates, to ensure the integrity of appointments. The RBI Act also provides protection for the acts of RBI officials carried out in good faith. No suit or legal proceeding can be brought against bank staff who act in good faith to carry out regulations or directions issued by the RBI, even if their actions have caused or are likely to cause damage. (OA 2005, pp. 146-147)