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40urjitpatel In the hot seat: RBI governor Urjit Patel | PTI

Reserve Bank’s reputation has a great deal to do with its independence

At the end of his term as Reserve Bank governor, Duvvuri Subbarao made an interesting comment on the differences between him and the finance minister: “I do hope Finance Minister P. Chidambaram will one day say ‘I am often frustrated by the Reserve Bank, so frustrated that I want to go for a walk, even if I have to walk alone. But thank God, the Reserve Bank exists.’”

Subbarao’s statement was a repartee to Chidambaram’s comment on “walking alone to face the challenge of growth”. The government and the RBI were not on the same page when it came to interest rates—the former wanted a rate cut to boost investment, but the latter was against it as inflation was still in double digits. Despite Chidambaram’s public expression of displeasure, Subbarao had not budged.

Concerns on independence of the RBI have usually been raised in connection with the monetary policy. For a change, fingers are now being pointed at the way the Central bank conducted itself in the demonetisation mess. There are allegations that the demonetisation was forced on the RBI, and Urjit Patel, the current governor, could not stand up to the government’s sudden decision to ban Rs 500 and Rs 1,000 notes.

The allegations are not without reason. As the country was facing the hardships of the clampdown on currency, the RBI governor was nowhere in the scene. In fact, Patel has addressed the media only twice after he took over the post in September 2016. In contrast, economic affairs secretary Shaktikanta Das briefed the media every alternate day post demonetisation.

The RBI issuing circular after circular, much to the bewilderment of bankers and public, did not help, either. But what damaged the Central bank’s reputation the most was bank officials and RBI officials getting caught in illegal exchange of currency. “There is no doubt that the RBI’s image has taken a huge beating,” said B.L. Pandit, former head of the department of economics at Delhi School of Economics. “We had the global financial crisis in 2008-09, and it was the RBI under the able leadership of Dr Y.V. Reddy which salvaged the economy. Demonetisation was a problem created by our own people but the RBI did not seem to be in control of the situation.”

In his deposition before the standing committee on finance and the Public Accounts Committee a week ago, Patel could not answer many questions on the remonetisation plan, the amount of scrapped currency back in the system and the strategy behind demonetisation. He has sought time for answering these questions.

All these indicate that the demonetisation was planned by the government, without considering the RBI’s views. And Patel caved in without any resistance. “The RBI’s autonomy has been compromised by the government. Demonetisation was done at the behest of the government. Patel told us that he had instructions from the government to call the board meeting to decide on scrapping of Rs 500 and Rs 1,000 notes,” said Saugata Roy, a member of Parliament’s standing committee on finance.

It is amply clear that it was the government which advised the RBI to hold a board meeting on demonetisation. After the meeting, it was recommended that legal tender status of Rs 500 and Rs 1,000 notes be withdrawn. What is still unknown is what happened at the board meeting—whether there were disapprovals or questions. “From what I understand, the board is not empowered enough to not approve a government recommendation. They can just express their views,” says M. Govinda Rao, former member of the Economic Advisory Council to the prime minister.

Experts, however, say the concern is not about autonomy but about the way the RBI handled the demonetisation. “Absolute autonomy of RBI does not exist, either in letter or in spirit,” said Rao. “On functions such as debt management and exchange management, it has to align with the Centre. The issue is one of implementation.”

That the government has been meddling too much in the affairs of the RBI was evident in the recent appointment of a senior finance ministry official for currency coordination. United Forum of Reserve Bank Officers and Employees called it a “blatant encroachment” on its exclusive turf of currency management. The union has asked Patel to resist “unwarranted interference”.

A former deputy governor, who spoke on condition of anonymity, agreed that too much of government interference is bad for the RBI’s independence as well as reputation. “Government giving instructions to the RBI on its areas of competence is simply not done. This is nothing but micromanagement by the government,” he said.

There are, however, opinions that the discussion on the loss of RBI’s autonomy is just loose talk. “The fact is that the RBI has to be accountable to the sovereign,” said Rajiv Kumar of Centre for Policy Research. “The government and the RBI have always worked in tandem. Its autonomy is limited to technical autonomy and the source of that autonomy is mandate granted by the government. The RBI’s reputation is based on whether it is able to maintain macrostability, contain inflation, and manage forex reserves and FDI. On all these counts, the RBI has done well.”

The government’s attempts to bypass the RBI or curb its independence are nothing new. Most governors had confrontations with the government, and on most occasions they upheld their independence. Patel surely has a great tradition to match up to.

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