In response to growing international concerns about the transparency of financial policies following the Southeast Asian financial crisis, the Reserve Bank of India (RBI) established the Advisory Group on Transparency in Monetary and Financial Policies in December 1999. This initiative aligned with the International Monetary Fund’s Code of Good Practices on Transparency in Monetary and Financial Policies, adopted in September 1999, which emphasized clarity in policy formulation, public accountability, and integrity. The RBI formed this advisory group under the chairmanship of M. Narasimham, with S. S. Tarapore as a member. The group was tasked with reviewing India’s legal and institutional frameworks, assessing the feasibility of rapid compliance with international norms, and drafting a roadmap for India to adopt best practices over time.

The advisory group identified several areas in which India did not fully comply with the International Monetary Fund code. While the RBI made significant efforts at disseminating monetary data and providing rationales for its policy decisions, there was a lack of transparency in how monetary policy objectives were set and communicated. This gap was largely attributed to the outdated RBI Act, which did not require clear the RBI to articulate its monetary policy objectives, leading to vague and sometimes contradictory goals.

A key issue identified by the advisory group was the conflict of interest inherent in the RBI’s dual role in monetary policy formulation and managing debt of the Indian government. The RBI’s responsibilities in managing the government’s borrowing program often compromised its ability to independently manage monetary policy. Debt management often took precedence, leading to the subordination of monetary policy functions. The group recommended the separation of debt management from monetary policy, allowing the RBI greater operational independence, or “headroom,” to focus solely on monetary control. However, it also noted that the RBI should continue to maintain orderly conditions in the government-securities market through open market operations. The group’s study of international practices revealed that many central banks, such as those in the UK and the USA, had successfully separated debt management from monetary policy, which enhanced the effectiveness and transparency of their monetary strategies. The group urged India to follow this model, as the intertwining of debt management and monetary policy in India impeded the RBI’s ability to effectively control inflation and interest rates.

The group made several key recommendations to address these deficiencies. First, it called for legislative reforms to amend the RBI Act and provide the RBI with greater autonomy in setting and achieving clear monetary policy objectives. The government, it argued, should define these objectives in consultation with Parliament and allow the RBI to execute them independently. To eliminate conflicts between debt management and monetary policy, the group recommended establishing a separate Debt Management Office under the government. This would allow the RBI to focus exclusively on monetary policy, particularly on managing inflation and interest rates. Additionally, the group proposed forming a Monetary Policy Committee (MPC) within the RBI, to be composed of the governor, deputy governors, and independent experts. The MPC would meet regularly, and its decisions and discussions would progressively be publicized to enhance transparency.

Moreover, the group recommended that the RBI adopt inflation targeting as its primary objective, similar to other advanced economies. The RBI should be given full autonomy to manage monetary instruments to meet this inflation target. In cases in which the government needed to intervene in monetary policy, its directives should be provided in writing and be subject to parliamentary scrutiny. Last, the group emphasized the need for greater transparency not only in monetary policy but also in other financial policies, such as banking supervision. It encouraged the RBI to adopt best practices in disclosing adverse supervisory actions to enhance market discipline and strengthen financial stability.

In terms of fiscal transparency, the group noted that while the central government met the minimum requirements of the International Monetary Fund code, there were deficiencies that could be addressed by passing the Fiscal Responsibility and Budget Management Bill. It recommended expanding the scope of the bill to include budget transparency, public disclosure of macroeconomic assumptions, and detailed reporting on contingent liabilities, tax expenditures, and quasi-fiscal activities. It also highlighted the need for state governments to improve their fiscal transparency standards, suggesting that state-level finance secretaries work together to establish minimum transparency standards to be achieved within a three-year time frame.

The group’s recommendations on the separation of the roles of the RBI would be echoed by the Tarapore Committee (2006), Percy Mistry Committee (2007), and Rajan Committee (2008). An independent Public Debt Management Agency has been proposed but not established.

The Advisory Group’s recommendations address the need for greater transparency and independence in India’s monetary and financial policy frameworks. By advocating legislative changes, separating debt management from monetary policy, and adopting recognized international standards, the group established a foundation for future reforms that would shape India’s monetary governance and strengthen the RBI’s independence over time.