By R. Devaprakash
The release of Raghuram Rajans book ‘I Do What I Do: On Reforms Rhetoric and Resolve’ revealed the ill-advised nature of demonetisation despite alternatives proffered by the central bank to deal with the shadow economy. The economic success of the move is still debatable and it has now opened up a discussion about Reserve Bank of Indias (RBI) autonomy.
Who owns RBI?
There are strong protagonists who argue for Government to adopt a big-brotherly oversight on policy and interest rate matters, given 80% of Indian financial system is owned by the government. The opposing view questions if the doctored policies subserve the governments interest. There may be a conflict of interest for the government while serving committees in the apex bank since such decisions are perceived to be borne out of political compulsions than economic considerations.
The recent attempt to influence RBI’s announcement of monetary policy in June 2017, resisted by the Monetary Policy Committee (MPC), has stirred up a debate regarding the central banks autonomy once again. There was also a proposition to have a super-regulator to regulate the RBI, perhaps a hidden attempt to safeguard government agenda. Not long ago, RBI was rebuked by its global peers for being silent on the centre’s impingement beyond its statutory definition, in what is called one of Indias historic economic reforms.
Transparency in governance and decision-making
Balancing the price stabilisation-growth tradeoff, blanket loan waivers or restructuring of loans, restructuring vs subsiding power boards, the extension for existing Deputy Governors or the induction of new, capitalising stressed banks from RBI reserves are everyday functions of the RBI. There is keen political interest to influence RBIs turf. The system of ad hoc treasury bills has been questioned on various occasions with the government using it as a pretext to freely source funds from RBI to finance fiscal deficits, fuelling inflationary tendencies. Successive elected governments interference has been unsuccessful in lowering interest rates, finally calling for intervention by the RBI. Divesting RBIs debt management function, inducting more nominees of the government into MPC without conferring veto power to Governor, the roles of local board members at the regional level and non-official directors were factors considered to be retrograde to RBIs independence. A dearth of assertiveness from the board was strongly felt in times of crises.
Self-ruled sovereign body
There needs to be a defined code of conduct for the RBI’s macro-policy management with the rules laid out by the government. The government should move away from insisting on pre-determined interim dividends to bridge the fiscal deficit and respect the financial year of RBI (July-June) which is different from Government fiscal (April-March). A sovereign decision by the RBI for inflation targeting stands in deference to many global studies pointing to the negative correlation between independence of central bank and containing inflation. RBI should be allowed to be a free-standing entity and be self-governed, as it used to be under the British rule. It should be allowed to keep an arm’s distance from the government to effectively deal with modern financial flippancy. This will allow the RBI to truly serve the economy, benefit the commoner and become a custodian of the economy.
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