A lot of analysis and writing was done into how India’s monetary policy has narrowed the gap with the modern and advanced world. With things like inflation target, constitution of MPC, releasing MPC minutes and so on Indian central bank has finally taken the leap. Then came the appointment of the new central bank chief and people jumped to all kinds of conclusions (see this as well). One should list all those views and ask the same experts of their opinions now. Am sure some would quote Keynes…
It just took one decision from the Government to change all this. Post 8 Nov 2016, we are back to what we saw in the 1950-1980s when RBI was treated just like another department of the government. Finance Ministry is back at the helm of the monetary affairs (it always is at the helm but had played a more secondary role in recent times). The major decisions are being announced by the Finance Ministry officials. Given the decision was taken by the RBI Board and most circulars come from the central bank, one should see central bank atleast taking some initiative. But nothing of this sort is happening. Even more amazing is how the old lost skills of writing circulars are back and giving us a lesson in Victorian English! The name of the bank has been changed by public given frequent changes and rollbacks.
Now Times of India tells us that the relation between the two has been strained. Central bank believes that its reputation is being compromised whereas teh government says that the central bank has been slow to enact. Really? One wonders the level of chaos if central bank was faster:
The central bank and the government often don’t see eye to eye even in the best of times, which these certainly are not. The stress of managing the process of demonetisation has brought to the fore some lapses in communication between the Reserve Bank of India and the government. The lack of coordination between the two has come in the way of smoother implementation of several measures.
The most recent instance is handling of the notification that put conditions on deposit of old notes worth over Rs 5,000 after December 20. Though the finance ministry took the decision, sources in the government told TOI that the RBI notification was “badly drafted”, particularly the section that made it mandatory to explain the reasons for delaying deposit of scrapped notes. The notification was amended on Wednesday removing limits on deposits.
Sources in RBI feel that the central bank’s image is being tarnished by frequent changes in circulars, most of which are issued on directions from the government.
A section within the government feels that RBI has been slow in reacting to cues. For example, it took the central bank three days to frame the rules that allowed families that had a wedding during November and December to withdraw Rs 2.5 lakh in new currency. When RBI did come out with the rules, they were so stringent that it was almost impossible to withdraw the money. The government had to step in and RBI eased one condition.
Another bone of contention has been the amount of old notes which have come back. The government has also contested the figure released by RBI on amount of old currency that is deposited with banks. Last week economic affairs secretary Shaktikanta Das asked RBI and banks to check the figures for any possible double counting. Sources in the central bank say RBI is torn between the people who are resentful of how the institution is being treated and people who are happily complying with the finance ministry orders.