How independent can a central bank head be?
How independent can a central bank head be?: Former Reserve Bank Governor YV Reddy pens his memories...
"Revelations made by Y V Reddy now and his successor Dr Subbarao last year explains the motives of political leadership in appointing FSLRC with a 'yours obediently' chairperson, which gave a report recommending breaking whatever remained of the backbone of RBI. The avatar of Dr Rajan on the scene retained India's central bank in one piece temporarily. Hopefully the generation of Urjit Patel and Viral Acharya will not delay dissent where appropriate, as they, like Dr Rajan can afford to be open while in service."
M G Warrier
RBI Autonomy: Final diagnosis
This refers to the piece “How independent can a central bank head be?” by G Naga Sridhar(Business Line, January 14). The revelations oozing out of Dr Y V Reddy’s “Na Gnapakalu”(My Memories) and the book “Who Moved My Interest Rate?” published last year by his successor Dr Duvvuri Subbarao together give the rationale for setting up of the Financial Sector Legislative Reforms Committee (FSLRC) with a ‘yours obediently’ chairperson, by the then political leadership.
The FSLRC chairperson proceeded with an assumed mandate to ‘truncate RBI to size’, with less emphasis on financial sector legislative reforms per se. The monologue report its chairperson wrote, brushing aside dissents from members and Dr Raghuram Rajan’s perseverance to minimize damage to the institution he presided over during 2013-16 have become history.
Dr Reddy has, in another interaction with media, said that he would have quit governorship, if GOI went against his advice in the matter of demonetization. In the absence of any evidence that RBI had opposed the move, observations like this coming from eminent veterans serve only to weaken the central bank further. Urjit Patel, who is fortunately healthy, has no option to get hospitalized on false grounds, either.
Now that three successive governors have been under political pressure to fall in line with GOI’s short-term perceptions about economic policy, the diagnosis is clear and pressure has to mount on GOI to restore RBI’s credibility and ability to perform the central bank’s mandated functions within the contours of the law of the land.
There is a concerted effort from vested interests to weaken RBI, by creating confusion about ownership (RBI’s capital belongs to GOI!), autonomy (An air of suspicion is created by giving an impression that RBI is seeking ‘functional and policy independence’ outside the legal framework, which is not the case) and comparison with functions of central banks elsewhere. Fact being, RBI’s role in India’s economic growth has evolved in the Indian context over decades, and the inseparability of alignment between monetary and fiscal policies as also the need for harmonious relationship between GOI and RBI was never under dispute till 1990’s. Once diagnosis is clear, cure is within the reach.
M G Warrier, Mumbai