In the past few months, the Reserve Bank of India (RBI)'s autonomy has been in focus. One causal factor was that the last RBI governor's term was for three years and he was not re-appointed. In the US, the Federal Reserve (Fed) chairperson's first term is for four years and in the UK the tenure of the Bank of England (BoE) governor is eight years. Another controversy was the non-reappointment in 2013 of a RBI deputy governor, who was initially appointed for three years. The subject of RBI's autonomy seems to be mired more in appointment issues and less on what the central bank did or should have.
In the US and the UK, monetary policymaking within overall inflation targets is the exclusive domain of the central bank. Some analysts cite central banks in developed countries as models to follow as they have adequate autonomy. How well have the Fed in the US and the BoE in the UK performed in overseeing financial sector stability, regulating banks and managing monetary policies in their respective jurisdictions?
Failings of financial sector regulators, including central banks, in developed countries led to the 2008 crisis. Subsequently, in the continuing era of low inflation and "great moderation", central banks purchased government and mortgage-backed securities, pushing real and even nominal interest rates into negative territory. The recent Jackson Hole conference from August 25 to 27 was attended by central bankers, academics and experts and was titled "Designing Resilient Monetary Policy Frameworks for the Future". The continuing faith at this conference in improving the transmission of low interest rates to keep inflation range bound and simultaneously raises growth, employment and real wages is unrealistic. For instance, there are demographic issues in Europe and Japan, and in the US blue collar workers have not raised their technical skills adequately.
After 2008, public funds were used in Spain and Ireland to support "bad" banks and soak up non-performing loans (NPLs) for resale to markets over time. It was tax-payers who took on the credit and market risks, and effectively transferred wealth to owners of private banks. In Italy, NPLs on bank balance sheets have risen to about 20 per cent of the gross domestic product (GDP) and some form of tax-payer support is inevitable.
Last week on September 9, stock markets in the US, followed by India on September 12, tumbled by about 2-3 per cent on whispers that the Fed may raise its benchmark interest rates sooner than expected. The so-called unprecedented monetary policies (UMPs) of historically low interest rates cannot continue indefinitely and there would be global consequences when they unravel. Logically, central banks in developed countries do not see themselves as answerable to the rest of the world. Counter-intuitively, in popular perception it is heads appointed central bankers win and tails elected government lose. That is, if inflation is held in check the credit goes to central banks and if not it is excessive government spending, also emotively called financial repression, which gets the blame. The substantive point here is not to find fault with central bankers, but to suggest that they are not infallible and that the flip side of autonomy is accountability.
On balance, RBI should have complete autonomy on all issues related to monetary policy, including a veto on the soon to be set up Monetary Policy Committee. Additionally, RBI should not be held accountable on an ex-post basis about its monetary policies, since hindsight is always 20 by 20. However, we should expect greater transparency about RBI's role in regulating banks and to be mindful about the financial sector's ability to play an uninterrupted role in intermediating credit. This role of central banks needs greater scrutiny and emphasis domestically and elsewhere.
Fresh investment has been inhibited in India because of the build-up of stressed assets on balance sheets of banks. The volumes of NPLs may have been contained at lower levels if RBI had made the extent of this problem public earlier. Even the latest RBI Annual Report, dated August 29 (governor's foreword to the Annual Report paragraphs 7 and 8 titled "Stressed Assets and Speedy Resolution" and pages 66 to 81 on "Regulation, Supervision and Financial Stability"), is not sufficiently frank about the causes and ramifications of this issue. It is for RBI to decide on the extent to which detailed revelations would reduce imprudent lending or inhibit additional investment. However, RBI should be held accountable if the flow of credit via banking channels is impaired.
The former RBI governor had publicly suggested that the government should grant a higher level to this office. Maybe the sense outside regulatory circles too is that the RBI governor should be of Cabinet minister rank, though the Warrant of Precedence does not mention the RBI governor. Incidentally, even if we are not convinced about the need for nuclear weapons/atomic energy, space exploration/satellites and missiles, we have to agree that the heads of the departments of atomic energy, space and DRDO are accountable for building expertise that is of considerable national interest. These departments are headed by specialists who hold the rank of secretary to government.
My experience in government has been that if the political establishment is uncomfortable about a person's views, then she/he is invariably not chosen for important positions. That is par for the course in most elected governments around the world. If the government of the day prefers subservience to competence it would not matter if the RBI governor were to be ranked at the level of a Cabinet minister. As we all know, it is proximity to those holding high political office that determines the de-facto, rather than the de-jure, pecking order. It is to the RBI governor's advantage not to be mentioned in this so-called Warrant. The level of the RBI governor has little to do with her/his autonomy as long as she/he is not seeking reappointment or some other largesse from the government.
The author is the RBI Chair Professor in ICRIER. Views expressed are personal.
j.bhagwati@gmail.com
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