India's Central Bank: What Lies Ahead? :: The Global ANALYST, January 2019

The Global ANALYST, January 2019
India’s Central Bank:
What Lies Ahead?
M G Warrier
“Having met with staunch criticisms for mass mismanagement of public money in the wake of the 2019 elections, the current government is valiantly trying to save its face. Invoking Section 7 is a saving grace for several reasons. It can earn the government a clean chit by validating its blaming of the RBI, and in so doing can build up political pressure on the central bank to dilute its regulatory policies in order to favour political clientele, and even stretch such pressure to siphon off the bank’s (internal) reserves over and above the surpluses transferable to the government, all for supporting its populist rhetoric.”
-Excerpted from Editorial, Economic & Political Weekly, November 3, 2018

The quote above sums up the media perception of the developments that led to the resignation of Urjit Patel as RBI Governor on December 10, 2018. I am not sure whether anyone who has been commenting on the developments in the Indian Economy will be able to make a balanced analysis of the current chaotic phase in the GOI-RBI relationship. As we have no constituency interests to protect, let us make a beginning. We will keep our options open to ‘take sides’ in the coming months as the drama progresses.
 Reserve Bank of India, by design, is not meant to be subservient to Government of India. Those who drafted the Reserve Bank of India Act during the second quarter of last century were well aware of the conflict of interest between Fiscal and Monetary policies. Those who are watching the current media debate on relationship issues between GOI and RBI need to read again the Sections 7, 8 (see Box 2) and 58 of the Reserve Bank of India Act, 1934 which are about the management of RBI.
A media report captioned “RBI, govt spar over panel head” published in a financial newspaper in the first half of November 2018 covered the glaring disagreements between RBI and GOI on some of the issues which led media to speculate about the imminent exit of the then RBI Governor Urjit Patel and one/some of his deputies.
In reality, GOI and RBI had come out with two equally competent economists, namely Dr Bimal Jalan GOI nominee) and Dr Rakesh Mohan (RBI nominee) to chair the panel to review India’s central bank’s economic capital framework (ECF). My response was, prudence demanded inclusion of both the celebrity economists with Indian background in the ECF Panel, as their rich experience in RBI and GOI besides their association with global financial/research organizations would enable the panel to have informed deliberations. The possibility of Dr Jalan, considering his own political leanings, himself moving out in favour of allowing his former colleague Dr Rakesh Mohan to head the Panel was also not ruled out. Media suggestion was to allow both to co-chair the panel, which was also not a bad idea. I felt that both were mature and seasoned statesmen and would know how to conduct the deliberations keeping the national interest uppermost. In the circumstances, I exclude the possibility of this issue having triggered the abrupt exit of Urjit Patel.
RBI’s capital since inception remains static at Rs 50 million. Bank’s reserves (Contingency Fund + Asset Development Fund) depleted from a self-set target of 12 percent of total assets (which RBI almost touched in 2009) to a low of 7.05 percent of total assets as on June 30, 2018. The percentage was 9.2 in 2014 from which year RBI continuously transferred its entire surplus income to GOI till 2016 resulting in depletion of this percentage every year since then. Earlier GOI listens to the alarm, the better for the Indian economy. Ideally, the ECF Panel should first arrive at a decent figure to be recommended as RBI’s share capital (say, upwards of the equivalent of US $ 200 billion, which itself will be too low, considering the responsibilities of India’s central bank). Needless to emphasize, RBI would also need a reasonably higher level of ‘liquid’ reserves. Keeping all these in view, the ECF Panel when formed should also consider creation of a “Capital Protection Fund” (in addition to the reserves) to which annual transfers should be made from Bank’s income an amount arrived at based on the level of inflation during each year.

Box 1
RBI accepts the challenge


Statement by Governor

On account of personal reasons, I have decided to step down from my current position effective immediately. It has been my privilege and honour to serve in the Reserve Bank of India in various capacities over the years. The support and hard work of RBI staff, officers and management has been the proximate driver of the Bank’s considerable accomplishments in recent years. I take this opportunity to express gratitude to my colleagues and Directors of the RBI Central Board, and wish them all the best for the future.

Urjit R. Patel
10th December 2018


RBI Press Release : 2018-2019/1362

December 12, 2018
Shri Shaktikanta Das appointed as Governor of RBI

Shri Shaktikanta Das, IAS Retd., former Secretary, Department of Revenue and Department of Economic Affairs, Ministry of Finance, Government of India assumed charge as the 25th Governor of the Reserve Bank of India effective December 12, 2018. Immediately prior to his current assignment, he was acting as Member, 15th Finance Commission and G20 Sherpa of India. Shri Shaktikanta Das has vast experience in various areas of governance in the last 38 years. Shri Das has held important positions in the Central and State Governments in the areas of Finance, Taxation, Industries, Infrastructure, etc. During his long tenure in the Ministry of Finance, Government of India, he was directly associated with the preparation of as many as 8 Union Budgets. Shri Das has also served as India’s Alternate Governor in the World Bank, Asian Development Bank (ADB), New Development Bank (NDB) and Asian Infrastructure Investment Bank (AIIB). He has represented India in international fora like the IMF, G20, BRICS, SAARC, etc. Shri Shaktikanta Das is a postgraduate from St. Stephen’s College, Delhi University.
 Jose J. Kattoor
Chief General Manager

RBI Central Board meets in Mumbai
The Reserve Bank of India’s (RBI) Central Board met today in Mumbai under the Chairmanship of Shri Shaktikanta Das, Governor, Reserve Bank of India. The Central Board placed on record its appreciation of the valuable services rendered by Dr. Urjit R. Patel during his tenure as Governor and Deputy Governor of the Bank. The Board deliberated on the Governance Framework of the Reserve Bank and it was decided that the matter required further examination. The Board reviewed, inter alia, the current economic situation, global and domestic challenges, matters relating to liquidity and credit delivery to the economy, and issues related to currency management and financial literacy. The draft report on Trend and Progress of Banking in India (2017-18) was also discussed.
Jose J. Kattoor
         Chief General Manager
Press Release : 2018-2019/1375    

Source: RBI Website

Please see the personal note posted by Dr Urjit Patel at RBI’s website on December 10, 2018. Reports show that his resignation was accepted by GOI next day and new Governor Shaktikanta Das took charge on December 12, 2018 (see Box 1)
I would like to substitute ‘responding to call of conscience’ for ‘personal reasons’ in the brief statement issued by Urjit Patel immediately after stepping down as RBI Governor. And, the substituted words include ‘personal reasons’ some of which do not remain secret anymore. But, for those personal reasons, Patel would not have left the institution in the lurch. Real reasons are national and not personal. I will not elaborate today. Will just recall another incident, taking you back in India’s history to 1975.
Sankara Pillai had run Shanker’s Weekly for decades, almost single-handed. He closed down the Weekly with a ‘Souvenir’, last issue of the Weekly appearing in July 1975, that is within almost a month from the declaration of National Emergency. Shanker could have ‘compromised’ and continued to publish the Weekly. He said, ‘Weekly could have taken the Emergency in its stride’. He closed it down for ‘personal reasons’. And those reasons included avoiding embarrassment and uncertainties to certain individuals and families who were part of the Weekly. Those who are curious can Google search for articles in The Hindu on the subject.
Each individual is different. GOI’s choices to man the top positions in RBI beginning with Dr Raghuram Rajan as Governor have been non-controversial and excellent viewed from the angle of professional competence. It would be interesting to think how Dr Bimal Jalan or Dr Y V Reddy or Dr Rajan would have responded to the situation Urjit Patel faced in the third year of his governorship. Also, it is worth pondering over as to whether things would have been different if the position of RBI Governor was more secure. These thoughts I will leave here with a quote from my own article on the appointment of Dr Raghuram Rajan as Governor, RBI published in the September 2013 issue of this magazine. I said:
“…The only negative in the whole affair is, as on several occasions in the past, once again GOI has opted for a short-term appointment. This time it should have been for a five-year term in the first instance itself. We are not privy to the information as  to whether the decision to appoint Rajan for 3 years was because of a casual/cut  & paste’ from previous appointment ordersor because GOI thought, if friction between RBI and GOI persists, changing RBI Governor is a soft option. As someone in the media has already observed, the flipside is, if things do not go well, Dr Rajan could choose an assignment anywhere, a choice, many in top positions in India do not have. Ideally, RBI Governor should have a tenure of 5 to 10 years…”
RBI will pass through this crisis sooner than all of us think. Thanks to the support the institution received from GOI from 1920’s (formative years) till today, there is an institution called Reserve Bank of India which will not succumb to injuries so soon. The signals from the press release issued by RBI after the Central Board meeting on December 14, 2018 and the media responses given by the new Governor Shaktikanta Das before and after the first board meeting he presided over are positive. He will start talking RBI’s language much faster than his IAS-predecessors.

Box 2
RBI Act provisions on management of RBI
Reserve Bank of India Act, 1934

7. Management
(1) The Central Government may from time to time give such directions to the Bank as it may, after consultation with the Governor of the Bank, consider necessary in the public interests.
(2) Subject to any such directions, the general superintendence and direction of the affairs and business of the Bank shall be entrusted to a Central Board of Directors which may exercise all powers and do all acts and things which may be exercised or done by the Bank.
(3) Save as otherwise provided in regulations made by the Central Board, the Governor and in his absence the Deputy Governor nominated by him in his behalf, shall also have powers of general superintendence and direction of the affairs and the business of the Bank, and may exercise all powers and do all acts and things which may be exercised or done by the Bank.
 8. Composition of the Central Board, and term of office of directors
(1) The Central Board shall consist of the following Directors, namely:-
(a) a Governor and not more than four Deputy Governors to be appointed by the Central Government;
(b) four Directors to be nominated by the Central Government, one from each of the four Local Boards as constituted by section 9;
(c) ten Directors to be nominated by the Central Government; and
(d) one Government official to be nominated by the Central Government.
(2) The Governor and Deputy Governors shall devote their whole time to the affairs of the Bank, and shall receive such salaries and allowances as may be determined by the Central Board, with the approval of the Central Government:
PROVIDED that the Central Board may, if in its opinion it is necessary in the public interest so to do, permit the Governor or a Deputy Governor to undertake, at the request of the Central Government or any State Government, such part-time honorary work, whether related to the purposes of this Act or not, as is not likely to interfere with his duties as Governor or Deputy Governor, as the case may be:
6[PROVIDED FURTHER that the Central Government may, in consultation with the Bank, appoint a Deputy Governor as the Chairman of the National Bank, on such terms and conditions as that Government may specify.]
(3) A Deputy Governor and the Director nominated under clause (d) of sub-section (1) may attend any meeting of the Central Board and take part in its deliberations but shall not be entitled to vote:
PROVIDED that when the Governor is, for any reason, unable to attend any such meeting, a Deputy Governor authorized by him in this behalf in writing may vote for him at that meeting.
(4) The Governor and a Deputy Governor shall hold office for such term not exceeding five years as the Central Government may fix when appointing them, and shall be eligible for re-appointment.
A Director nominated under clause (c) of sub-section (1) shall hold office for a period of four years and thereafter until his successor shall have been nominated.
A Director nominated under clause (d) of sub-section (1) shall hold office during the pleasure of the Central Government.
(5) No act or proceeding of the Board shall be questioned on the ground merely of the existence of any vacancy in, or any defect in the constitution, of the board.
(6) 7[***]
(7) A retiring director shall be eligible for re-nomination.
End Note: Sections 7, 8 and 58 of the RBI Act, 1934broadly define the contours of RBI management.

*(Submitted version)

(Writer is a former central banker and author of the 2018 book “India’s Decade of Reforms”)


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