This column, now continuing for more than 30 years, has often been critical of the Reserve Bank of India (RBI) in relation to its exchange rate policy, regulation of derivatives in particular and banks in general, and, sometimes, its monetary policy. It is time perhaps to balance the books in a longer term perspective.
In one way or another, I have been dealing personally with RBI and its policies since the mid-1960s, i.e. for the last 45 years (I had been employed by its subsidiary SBI since 1957). My connection with the bank thus goes back longer than perhaps that of any of its existing employees! Over the period, I also had the privilege of working on various committees appointed by the central bank. For many years now, I have also had the privilege of being invited, along with economists and commentators, to share my views on policy issues at the highest level of the bank. Such formal meetings apart, informal discussions keep taking place at various levels. Many of my colleagues are pleasantly surprised at the cordial personal and institutional relationships that have been continuing despite persistent criticism of specific policies in my columns.
In fact, this is the great strength of the organisation — it is open to views different from its own and takes them into consideration while framing policies. (As one former executive director mentioned to me only half in jest: “While we may not do anything about your arguments and suggestions, one thing I can assure you is that a file gets started”!) On a more serious note, compared to most central banks in the developing world, its record on inflation control, management of the exchange rate and external account, safety of the banking system has been far superior — clearly a manifestation of its professionalism. One reason for this professional culture could well be — and I confess to Mumbai-chauvinism on this point — its location away from Delhi, away from the often feudal culture in Delhi.
One should also mention another factor: Unlike most other public institutions, there has never been a whiff of corruption or malpractice about its functioning even when it had huge discretionary powers under exchange control, the credit authorisation scheme, etc.; few public institutions in India can make such a claim.
One would have thought that the government would be anxious to preserve the autonomy, powers and culture of such an institution. But one smells from several recent moves an unmistakable trend of taking power away from Mumbai to Delhi. At one level, it was the purchase of SBI’s shares from RBI; now, it seems, there is a move to do the same about the National Housing Bank, the National Bank for Agriculture and Rural Development, etc. There is also the proposal to take public debt management away from RBI, to a unit under the finance ministry. I am sure that individually each move has some plausible justification but, collectively, the intention is clear.
Is the last point (debt management) aimed at getting an even greater say in monetary policy? To be sure, in a socio-political economy like that of India, a central bank cannot have a single-point agenda of inflation control, whatever the monetary purists may say. It will need to have a broader developmental agenda — and this means coordinating monetary policy with fiscal policy. But the fact remains that one can hardly remember a time when so many Delhi bureaucrats made public statements on inflation and the specifics of interest rate policies — the finance secretary, the economic adviser, the secretary, the Ministry of Statistics and Programme Implementation, the commerce secretary, the finance minister himself, etc. Does this help in framing policies to manage inflation expectations, which is what the central bank is supposed to do? Even on banking regulation, one sometimes wonders whether Delhi is driving the agenda on issues like credit derivatives, for example, in the name of financial sector reforms and encouraging innovation.
The provocation for these thoughts is the move to convert the ordinance on regulatory coordination into an Act, instead of allowing it to lapse, as the RBI governor has suggested, perhaps with some cosmetic changes. One can add little to the substance of the argument over the issue to what the governor has so brilliantly articulated in his letter to the finance minister — see Tamal Bandopadhyay’s column in Mint (July 13) which quotes some extracts.
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Overall, it would be a sad day when the independence and autonomy of the banking regulator are curbed — or a vehicle was created that could be used for the purpose later.
Tailpiece: Toyota has had major and well-publicised manufacturing defect problems on some of its models and has had to recall a large number of cars for correcting the defects. The US Department of Transportation has analysed dozens of accidents involving Toyota and come to the conclusion that most of the accidents were due to driver failures and not car defects. Can one imagine an Indian regulator, or even the media, coming to such a conclusion where a foreign MNC is involved?