Note bandi: Questions over RBI autonomy

In the normal course of time, four and odd months is too short a period to judge performance of a person who steps into a new role. More so in the case of Reserve Bank of India Governor, who has a myriad of roles to play and execute.

The Reserve Bank of India, RBI in short, is a complex set-up that safeguards the India’s economic and financial system, acts as the custodian of the country’s foreign exchange reserves – the lifeblood for any nation’s well-being in these times of globalisation, protects Indian currency from global headwinds, and dexterously strikes a balance between inflation, the upward trajectory of which hurts the poor more, and the growth without which no country can march towards development.

The biggest responsibility of the central bank, however, is to protect the Indian economy and its primary beneficiaries, the country's citizens, from any upheavals that some decisions of the political leadership at the Centre might cause.

That means the one at the helm of the apex bank shall steadfastly resist any measures from the government that would undermine the interests of people at large.

That, however, doesn’t mean that RBI has full autonomy. Established in Kolkata in 1937 under the Reserve Bank of India Act, 1934 by the then British authorities, and shifted to Mumbai two years later, the apex bank was and is governed by a central board of directors under the overall stewardship of governor.

Both the governor and directors were the government’s appointees from the beginning. And there is not much difference now even though the RBI Act has been amended several times – last instance being in June 2016 for bringing in Monetary Policy Committee (MPC) that further reduced governor’s hold over the central bank.

Since those who govern the apex bank are appointed by the central government, it goes without saying that it doesn’t enjoy full autonomy.

However, keeping the importance of the bank in view and the kind of critical role it plays in shaping the country’s economy, successive RBI governors, particularly those who took over the reins post-Independence, assiduously cultivated a tradition that over a period of time enabled the central bank to emerge stronger and stand on its feet against the government’s interference. This independent character of RBI was clearly evident in recent years.

Y Venugopal Reddy, an Indian Administrative Officer (IAS) who served RBI Governor for five years from September 6, 2003, acted independently and laid down solid a policy framework that helped India steer clear of the 2008 global economic meltdown with a minimum disruption.

His successor, Duvvuri Subbarao, also steadfastly refused to yield to external pressures to lower interest rates, citing high inflation.

He went to earn the sobriquet of ‘inflation warrior’. Raghuram Rajan who replaced Subbarao in September 2013 followed in the footsteps of his predecessors with more vigour. Dubbed by many as rock star Rajan, he did what he wanted to do, and what was good for the economy and more importantly for the Indian currency.

But things quietly changed at RBI with the advent of Kenya-born, Gujarati-speaking Urjit R Patel who took baton from Rajan in September last year as the apex bank’s 24th Governor.

Though the MPC came into picture with his tenure, a reticent Patel surprised everyone with an unexpected rate of 0.25 per cent in his first monetary policy review in the first week of October 2016.

Nobody anticipated such a generous gesture and so, his sudden move made some believe that he was toeing the line of his bosses at the North Block, the headquarters of finance ministry in New Delhi.

The North Block contingent consistently made fervent appeals to Rajan to cut rates in order to spur growth, but he refused to heed to such requests as the inflation hovered in a higher orbit.

But RBI’s credibility received a major blow when the Narendra Modi government announced demonetisation of Rs 500 and 1,000 notes on November 8, sending seismic waves across the country.

The move sent the banking system out of gear and pushed the country into cash chaos as nearly 85 per cent, or Rs 15 lakh crore, of currency went out of circulation and RBI failed to supply sufficient quantity of new currency.

People died in bank queues, millions of others went through excruciating pain, trading and businesses took a huge hit, companies stared at losses and daily wages failed to get work, even as the central government defended the haphazardly-executed decision, saying the note ban would curb counterfeit currency, choke terror-funding, and bring in a windfall gain of Rs 4 lakh crore in the form of black money to the Centre’s coffers.

RBI had given a 50-day window to deposit the banned notes and the deadline ended on December 30, 2016. Shockingly, there is no word yet from the RBI on the success or failure of the demonetisation exercise even after a month after the deadline for depositing old notes in the banks, has ended.

The apex bank did not even disclose till now the amount of banned currency that knocked at the doors of the bank branches.

The trillion dollar question now is why RBI is not releasing the demonetisation data and also not coming out a status report on an exercise that put more than a billion people on cash tenterhooks for nearly two months.

It is no exaggeration to say that demonetisation exercise put autonomy of RBI at risk, exposed the decision-making capability of RBI Governor (he allowed such a massive exercise within three months of taking the charge) and damaged economic growth. Will he protect the autonomy of RBI at least now by releasing a status report on note ban before
it’s too late?