A review of History of RBI – 1982-97

Prof TT Ram Mohan of IIM Ahmedabad has reviewed the recently released history of RBI from the period 1982-97. One just wishes that we had far more coverage and research on monetary history. India seriously needs econ historians who help understand things apart from the official history alone.

The author begins with an interesting take:

The Reserve Bank of India (RBI) makes news, perhaps more news than a central bank should be making. The RBI’s monetary policy statement cannot match the union budget’s capacity to attract eyeballs, but it makes up in sheer frequency – its monetary policy statements come out every quarter and in the middle of each quarter. Then there are the speeches and interviews of RBI’s senior officials, its circulars, and numerous publications, all of which make news in varying degrees.

If history is the aggregation of news, the RBI can be justly said to be an active creator and shaper of history. It is appropriate that its history should be chronicled. The RBI has set out to do this with its own internal team. The fourth volume of its history came out a few months ago.

The volume is meticulously researched. However, it is by no means an analytical history. Tensions in the relationship with the government are touched upon very briefly and with the lightest of touches. Correspondence with the government is shared, but sparingly. There is virtually no mention of debates within the RBI on the many issues that are covered. Internal memos and minutes of meetings would have shed much light on the options that the RBI agonised over, differences of opinion, and active dissent. Alas, none of this figures in the volume.

Hmm..It is all about hype these days trying to make sure history notes you..

This volume was anticipated for its focus on the 1991 crisis:

As is well known, the BOP crisis of 1991 turned out to be a defining moment in the evolution of economic policy in India. The volume documents how the RBI had been alerting the government since 1988 to the worsening BOP situation, caused mainly by a worsening fiscal position, and also hinting at the need to approach multilateral institutions for assistance.

The volume gives a riveting account of how the crisis unfolded and was resolved. The account reminds us that although the deteriorating fiscal position was the root cause, a number of other factors combined to precipitate a BOP crisis – the increasing proportion of short-term debt in external debt, the overvaluation of the rupee since 1987, domestic political uncertainty, the break-up of the Soviet bloc, and the Gulf war and the burdens posed by the consequent repatriation of Indian nationals there. What might have been if these other factors had been absent and what course Indian economic policy might have taken must remain among the tantalising questions our economic history does not tackle.

When the crisis hit, the government and the RBI considered four options – default on foreign debt, seeking private funds from abroad, use of gold reserves, and seeking emergency bilateral assistance. While the third and fourth were indeed used, they were perceived as inadequate. Resort to the IMF became inevitable. The volume notes that this option was put to both the two previous short-lived governments but could not be pursued under uncertain political conditions.

The volumes notes that IMF assistance was quite small ($1.2 billion) compared to the dimension of the crisis (short-term debt alone was $6 bn), but it gave international credibility to the reform programme and also helped set clear objectives and benchmarks.

Apart from long-term liberalisation measures, it was the combination of short-term measures used to address the external crisis that was interesting. These included the sale and repurchase of government gold as also raising loans against gold, two new schemes for attracting non-resident Indian (NRI) deposits, and the India Development Bonds floated by the State Bank of India (SBI). This experience in devising short-term responses to an external crisis, no doubt, stood the RBI in good stead in late 2013 when the rupee came under severe pressure.

A striking feature of the handling of the BOP crisis was the close coordination between the government and the RBI. The undertone of acrimony, seen earlier, was absent. No doubt, the chemistry between Finance Minister Manmohan Singh and the RBI top management made a huge difference (C Rangarajan, who was deputy governor in the initial period of the crisis in 1991, had been deputy governor under Manmohan Singh). One conclusion to draw might well be that the RBI is most effective when it is on the same wavelength as the government and enjoys the latter’s backing.

The bold and italicised para is interesting. Very similar measures were taken in 2013 as well despite the authorities saying it is not 1991.

Apart from this, the author has some interesting observations on the usual disagreements between RBI and FinMin, objectives of RBI during the period and RBI as an institutional builder.

In the end, the author has an interesting take on the idea of RBI’s relation with govt:

In the estimation of the people of India, the RBI today stands tall, rivalling or even surpassing in its majesty such august institutions of the state as the Supreme Court, the Central Election Commission, and the Indian Army. Across the realms of monetary policy, regulation and supervision, the RBI enjoys a certain reputation for quality as well as integrity. This is especially striking at a time when government and government-run institutions are not well regarded.

….At the same time, it is important not to draw the wrong conclusions from the RBI’s eminence at the present time. It is tempting to conclude that because the RBI has performed so well, it deserves much greater autonomy, that monetary policy and banking regulation should be left to the RBI alone or to some panel of experts constituted by the RBI.

Rather, the correct conclusion to draw is that the RBI has done so well because, as the book clearly shows, it has exercised its judgment after duly factoring in inputs from the political authority. In other words, because it has enjoyed just the right degree of autonomy.

An institution such as the RBI that takes decisions that impinge directly on the lives of large numbers of people must enjoy legitimacy in the eyes of the people. Such legitimacy can come about only when the concerns of an elected government are taken into account, as has indeed been the case over the years. To put it simply: “if something ain’t broke, don’t fix it”.

This is nearly opposite from what other experts say – RBI is so broken that can’t be fixed! This is because of ignorance of history which shows how central banks have always worked well when the objectives have been aligned with that of the govt.  And this is where most battles are. The last 20-25 years have completely skewed the debate in favor of central banks/monetary policy. The pendulum has swung from one to other –  from govt takeover of central banks to complete independence of central  banks. The answer always lies in the middle..

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