The sudden reversal of fortunes on views over RBI’s independence…

The current RBI Governor must be surprised to read the constant change of opinions over his tenure.

The tenure started amidst huge hype as the consensus opinion was that Government preferred continuity over change. This opinion nosedived with demonetisation and cards were out that RBI independence was history. After the recent release of Annual Report 2017-18, there is again a reversal of opinion in some corners. They say he never gave up RBI independence and it was unfair to blame him for the note ban. We should instead appreciate his tenure for shepherding Monetary Policy Committee, tough stance on Bank NPAs and trying to sort bank governance matters. Seeing these topsy-turvy opinions, he might just be shrugging his shoulders and saying to himself, “perhaps the only thing constant is change of opinions”.

To any student of central banking and monetary policy this reversal in stance is highly surprising. After all, demonetisation was one of the biggest events in independent India’s monetary history and was given green signal by RBI’s Central Board chaired by RBI Governor. Given that the demonetisation policy was unsuccessful in meeting most of its unstated objectives, how did media have such a change of heart? And that too this quickly?

Some people have said no RBI Governor could have prevented the demonetisation. They point that CD Deshmukh and IG Patel who were Governors during previous demonetisations in 1946 and 1978, opposed the move but could not prevent it from happening. So, it is unlikely that the current regime would have been successful.

But this is where these opinions are not correct. We clearly know from RBI history and IG Patel’s memoirs that they opposed demonetisation and then the Government had to use the Ordinance route to implement the note ban. The decision to ban the notes then moved from RBI to Government and they had to figure out ways to battle and debate in Parliament. Atleast this way, RBI was broadly absolved of the matter. The responsibility for demonetisation in 1946 and 1978 lies with the Government but in 2016 it lies with the RBI Central Board. There is a huge difference between the two situations.

We wish for independent institutions for these very tasks. If they agree to whatever the government says, then what is the point of all this independence? And then Mr. Deshmukh and Dr Patel said no to Government when the central bank was seen as a department of the Government. The central bank independence was hardly even mentioned at that time.  The refusal decision becomes more interesting given the context and clearly both earned their place in central bank history.

By 2016, the sentiments had changed and central bank independence has become one of the major research areas. This makes you wonder whether the central bank has become more or less independent? We may have dejure independence but defacto?

Leave aside independence, what is more shocking is complete lack of accountability. How come none of the Board members have said anything on the issue? How come the financial media has never reached out to anyone and asked them about what made them vote for the decision? If they refuse, this has to be reported as well.

It was surprising that none of the MPC members said anything about demonetisation at all. The Committee was constituted in Oct-2016 amidst much fanfare. Just a month later, the biggest monetary decision was taken by the Central Bank Board as it led to significant decline in interest rates. Yet no objections were raised by any of the MPC members.

Infact, we do not know anything about RBI Board meetings these days. Earlier, RBI would disclose via a Press release that a Board meeting was held, but it has stopped doing so. We only learnt from RBI Annual Report that in Jul 2017 to June 2018, 6 Board meetings were held in Kochi, Mumbai (three meetings), GIFT City (Gandhinagar), and New Delhi.

It is easy for RBI to talk about governance in banking system but what about itself? We know how RBI Board was highly understaffed on the eve of demonetisation and remains empty even today. Yet there is no mention of this.  One of the Board Members resigned on 4 Sep 2017 as that person was appointed elsewhere and yet there was no press release from the central bank.

The financial media is more to be blamed here. They just dismiss recent past as history and move quickly to present and future. But institutional accountability is key and has to be pursued with relentless fervor.

2 Responses to “The sudden reversal of fortunes on views over RBI’s independence…”

  1. Anantha Nageswaran Says:

    Very good blog post

  2. Two years of Patel, the RBI Governor – The Gold Standard Says:

    […] Tamal Bandyopadhyay adds his two cents worth of tribute to Urjit Patel while Amol Agrawal provides the much-needed alternative […]

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