Turns out to be Yama’s affectionate rope?

Time and again there has arisen heated discussion on the role and status of Reserve Bank of India (RBI), especially about its autonomy. Hitherto, general public and experts in banking circles were under the impression that RBI enjoyed adequate freedom in taking decisions relating to monetary management. The institution has the specific purpose to carry out.

It is expected to keep a vigil on the operation and performance of the economy and deploy appropriate tool to correct the course of the economy. RBI commands great respect among the Central Banks of the world.

Even the Federal Reserve System (Fed) had to undergo the financial turmoil during 2008 by virtue of its policy response in terms of allowing lending to primary dealer banks, offering loans to brokers and cutting interest rates by a half percentage point.  

The Fed also helped to take over some ailing financial intermediaries (like Bear Stearns and AIG) as a measure of stopping the collapse of financial institutions and the consequent triggering of another depression.

All this had happened when Ben Bernanke assumed the charge as the new Chairman of Fed. Since then, the Federal Reserve has always acted so swiftly to avoid financial crises and foster maximum employment and price stability.

In both the cases, the Fed was criticised as having forced the sale of Bear Stearns to J.P. Morgan at bargain prices and extend loan to AIG. The fact is that the economy always poses challenges. In spite of great care and watch, Fed could not imagine the debacle of Lehman Brothers.

Interestingly, this episode also started simmering around 2008. The large-scale criticism on the Fed in this regard is that it was partially benevolent on a few institutions and allowed Lehman Brothers to fail. Whatever be the criticism, there had been a conscious effort by the Fed in taking appropriate or inappropriate measures. Surely, it had been in action.

On the contrary, the RBI as a Central Bank has the envious appreciable record in terms of pressing into service the required tools to ensure price stability and regulate credit flow. It is not as though that the government (Finance Ministry) and the RBI shall gauge the economy through the same lens. It is neither expected, nor warranted.

The Central bank needs to be allowed to think and act independently. It is only then, there could be impassionate opinion about the functioning of the government and economy. There were many a case in the past, when the government in power was making hilarious statements about the ‘economy shining’.

It is the Central Bank which exhorted the people that there was no such case to be so Jubilant about. The expectations of the bank were proved right to the utter dismay of the bosses in the government. It is, therefore, necessary that we promote, nurture and permit ‘competent agencies’ to carry out their designated job.

It is unfortunate that the RBI is now dragged into the controversy as to its independent functioning. At least, it is one such institution that needs to be kept at ‘arm’s length’ from the government and its influence. It is the cooperation and sharing of knowledge that helps the government to appreciate a different point of view. It appears as though that the government and RBI are at loggerheads.

If this is to be true and the tussle gets intensified, it would harm both and the credibility is lost. Very surprisingly, certain Sections of the RBI Act, 1934, are now under scrutiny. Especially, Section7(1) has become the matter of contest.

As per Section 7(1) of the Act, the Central government may, from time to time, give such directions to the bank as it may, after consultation with the Governor of the bank, consider necessary in the public interest.  A plain interpretation of the provision may be understood as a ‘saving clause’.

Whenever, the government feels that it is necessary to issue direction, it may use its powers as an extraordinary or emergency power. It does not mean that the RBI always waits for or works, based on the instructions of the government.

Any interpretation beyond this, would only amount to limiting the operation of the bank and piercing into the ‘sacred veil’ of freedom. If one goes by the happenings around and the claims and counter claims in the nature of statements or directions are highly unwarranted. It is like making public the sacred relationship between the wife and the husband.

Under the given circumstances, resolving the issue, if not the dispute, between the two is the pressing need. In this context, we may take cue from the practice adopted by the Treasury Department and Federal Reserve System of the USA. Wherein the two had signed an accord in 1951 to use the monetary policy by the Fed to keep interest rates low to help finance the war effort. It was also meant to hold down the cost of the huge Federal government debt accumulated during the war. 

This accord turned historical in the Central Banking Policy, though the whole agreement was only one paragraph. But it could reassert the ‘principle of independence of the Fed in stabilising inflation and macro-economic activity’.  

Though this arrangement could emerge as an aftermath of the war effort, it may serve to be a guidance to all the Democratic governments, that wish to repose confidence in the independence of certain important institutions. Similar to the same, the government of India may also think of such an accord if it feels that there had arisen such an emergency. In any case, seeking to use the powers under Section 7(1) would only undermine and dampen the spirit of independence.

A permanent solution to this problem could be to make the RBI really an independent body like the Election Commission of India or the Comptroller and Auditor General of India through an amendment to the Constitution.  It is high time that the entire nation focuses its attention to save the economy from being tinkered.

Lest every party in power should carve out a reason to poke into the façade. If once allowed, it continues to be a practice unhindered to the detriment of the economy. Hope that wisdom would prevail on the government circles. (The writer is former VC, Acharya Nagarjuna University & presently Director, East Asian Group of Institutions, Bangalore)

By Prof K Viyyanna Rao