Institutional identity of Indian central bank has been damaged….

This blog had warned that we should be more careful while judging central bank appointments. There was a wide feeling by wide number of experts that the appointments at the Indian central bank signals recognition for expertise, need for continuity and what not. Others added how the newly constituted MPC had put India in the league of global peers and how they along with the government will power India into the next set of growth.

How quickly all these beliefs have changed. Even skeptics like this blog are stunned by the sheer pace of the events. Enough has been said about state of governance within the central bank. Even the MPC members will not know their role as they just paused in December meeting. The experts said that this was a clear signal that RBI independence is back (so quickly!). The bankers all praised the move only to cut the rates in new Year of 2017 like not seen before. Not one statement has been made on the relevance of having so many experts decide interest rates when they can be changed so easily. It has taken

In the interim of all this we had another announcement of a new central bank appointment. And again we saw similar views as made in August. One would think there would be some learnings but alas there is nothing of this kind. All these repeated mistakes keeps taking you to this stinging piece on state of media in India.

All this while, it has been disappointing to see former central bank officials not coming to help the organisation. This has been the practice in India for a long time as outgoing officials don’t comment on policy much letting successors do their job. But this is not a day to day thing and clearly requires former heads to come and share their views. But instead they were telling us things which could have been best left to analysts.

Now, finally we have Dr YV Reddy raising concerns:

Former Reserve Bank Governor YV Reddy on Monday said: “The role of central bank in our economy is under threat and it is a national problem which has to be addressed as a national problem”. In an interview to CNBC-TV18 channel, the former Governor also said, “my own suspicion is that the institutional identity of the RBI has been damaged.”

“I would even go to the extent of saying that particularly recent events, I have seen the comments from economists, from Standard and Poor’s and they are disturbing. For the RBI, for a central bank, reputational risk is the worst risk. Credibility is the worst risk. And if this is happening in the international opinion, I would say that it is a national problem now and it is not just a political issue,” Reddy said.

“I think it is time, it is like army which is the security of the country, the financial and monetary security of the country. So, there should be a debate at this juncture given the type of comments internationally cutting across political parties that what should be the nature of central bank and what it should be and how it should be run,” Reddy said.

“The question is that there is a problem of reputation and the reputation cannot be ascribed entirely to individuals. There has been institutional changes and procedural changes which have created confusion about the identity itself and effectiveness and therefore, the reputation. Now, what should be the new structure?” he asked. “There should be better clarity about the new structure. The old framework, whatever the background, which committee, which commission, which judge produced it, we need not go into it. The limited point is, the role of central bank in our economy is under threat and it is a national problem which has to be addressed as a national problem.”


The transcript of the interview is here.

He says how interview process for selection of heads is all compromised:

Reddy was also critical of the way Governor and Deputy Governors is selected. “Whatever it is, definitely, I think there is a problem, especially after the legal amendments, the way the Governor is selected, the way they are interviewed basically, let me tell you, if the Deputy Governor has to be selected by an interview by a secretary, I was myself a secretary, I cannot be interviewed by colleagues and juniors for a job. There is no way I would go,” he said.

“At the moment, I think there is a committee where the Cabinet Secretary is the Chair and the Governor is a member. Let me be very frank. I have a feeling that the RBI is treated as a regulator to the confusion at a philosophical level. There are two types of confusion. To be very frank, my own suspicion is that the institutional identity of the RBI has been damaged, let me be frank,” Reddy said.

Of late, there’s more emphasis on its monetary policy, he said. “Earlier, the RBI is the monetary authority, yes. But it is a full service central bank. It was in charge of many other things. The recent emphasis appeared as though monetary policy is the main function. Governor is accountable to monetary policy. Then he is not accountable to regulation, he is not accountable to currency coins? There is a confusion about relative importance. That relative importance is being decided more outside than within,” he said.

“And the final analysis and particularly, for our country, the financial stability function should have been with a non-political set-up like Governor of the RBI. Now, that initiative is gone to the government,” he said.

All these things are becoming so important now given how bad things are turning out to be.

It also tells us how we have taken these governance things for granted. We have just been talking about highly superficial things like inflation targets, committees and so on. And all this while institutional structures were being weakened by capturing things that eventually matter the most.

The early history of Indian central bank shows how founders were so concerned with this governance aspect of the central bank. These things were well understood back then. All this has been lost as these things are hardly emphasised in any course on monetary economics. All we care about is targets and instruments which are way too overdone.

It is also high time that our economic experts give up their political affiliations and speak the truth (not be a part of so called post-truth era).


7 Responses to “Institutional identity of Indian central bank has been damaged….”

  1. Anil Says:

    Hi Amol,
    Couple of days back Ex-Gov Bimal Jalan Sahab also gave his two cents on demonetization exercise. Though he restricted more toward the present case rather than the appointment of Governers and ther deputy per se.


  2. Jidnyasha Says:


    What if banned old notes deposited in banks & now with RBI is more than issued currency ( 15.44 lakh Cr)?

    Who will loose credibility RBI or the old guards at Mint street or North Block in Delhi?


  3. Jidnyasha Says:

    Well, We have to evaluate the mammoth exercise based on number of parameters, broad benefits – tax collection, banks capitalization and cost – monetary, non-monetary, economic etc instead of just RBI’s autonomy and credibility.

    Indeed, RBI’s credibility has taken hit but I wondered if the citizens would have responded, so surprisingly patiently, to note ban had the announcement came from RBI Governor. Perhaps, the political parties would have forced RBI to roll back the decision and this leadership, mass appeal angle is completely missed by the commentators.

    Sanjay Baru described this decision as political more than economics. here is link –


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