An autonomy policy

Demonetisation process raises troubling questions over the way government has treated RBI. Central bank needs to assert.

By: Editorial | Published:January 11, 2017 12:08 am

Over 60 days after the first announcement of withdrawal of high value notes, the major collateral damage, apart from the economic disruption it triggered, has been to the image of the Reserve Bank of India (RBI), which has been handling the currency swap arrangements. It is a view, which has now been amplified by Y. Venugopal Reddy, a former RBI governor, who said in an interview that he suspects the institutional identity of India’s central bank has been damaged over time.

It is worrying when a former RBI governor raises concerns relating to the credibility and reputation of the central bank. To quote Reddy, “If this is happening in the

international opinion, I would say that it is a national problem now and not just a political issue.” These are strong words, reinforced by a report also in this newspaper on Tuesday that it was the government which “advised” the RBI to consider withdrawing currency notes of denominations of Rs 500 and Rs 1,000. Last month, former prime minister and a former RBI governor himself, Manmohan Singh, had said in Parliament that the constant modification of rules for withdrawal of money reflected poorly also on the RBI. Singh added that while he was sorry to see the central bank being exposed to criticism, he felt it was justified. The last time the RBI may have faced a similar risk to its reputation was during the securities scam in 1991-92. That, however, led to significant institutional changes and a progressive rise in the stature of the central bank. The professional leadership that helmed the RBI have also convinced successive governments to respect the bank’s autonomy: They have also been fiercely protective of the bank’s role as an independent regulator.

Given the enormity of the implications of demonetisation, the RBI leadership ought to have been more communicative to the public. The core issue is the credibility of the central bank and public trust. This is critical because at stake is the stability of the economy, which in turn, hinges on the credibility of the central bank — not just in the eyes of global investors and rating agencies, but also from the perspective of the entities the RBI regulates. The government too ought to be mindful of the potential risk if the perception gains that the moral and institutional authority of the RBI has been weakened. There is increasing recognition that the RBI cannot be viewed or treated merely as just another regulator or a macro prudential supervisor. For, that’s what it has sometimes appeared like during the demonetisation process. Its disquieting silence, muddled signals and its reluctance to ask questions have dented its authority. The challenge before the central bank is to assert itself, reclaim the space vital to the health of the institution.

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  1. A
    Jan 13, 2017 at 11:16 am
    For me personally speaking as a citizen of this country, i have lost complete faith in the insutions of executive government and more seriously complete loss of faith in the Reserve Bank Of India as it is plain to see how easily it was manited by the government in power. This means it is no longer an autonomous independent body. I have zero faith in the currency that it issues and it is now a plaything for the government of the day. To the reserve bank governor i say you have no spine sir to protect what your predecessors protected shame on you.
  2. A
    Am A
    Jan 13, 2017 at 10:30 am
    The issue is past govts be it Congress, BJP or Third Front were at least prone to criticism and at least tried some course;br/gt;lt;br/gt;But under Modi, the govt has become stubborn and arrogant. Instead of accepting course correction, it only tries to change the narrative or take cover under alt-narratives like nationalism etc.
  3. A
    Ashley Lionell
    Jan 13, 2017 at 1:03 pm
    Very true. That is exactly what is happening under the Modi govt. And that is exactly what is worrisome.
  4. S
    Subrata Chakraborty
    Jan 11, 2017 at 5:25 pm
    The challenge today is not for an independency of an insution like RBI alone ? The challenge today is to save the country from total collapse since the ex-Governor,RBI exposed the serious ills of Indian banking system, living on 'et bubbles', faced with 'serious insolvency' position, practice of 'crony capitalism' etc. and attempted for necessary correction. Unfortunately, he was not allowed to complete the task though he shown his courage to raise the issues while in the job without waiting to comment after taking retirement from the job like most of the others. The ills referred by him experienced by the people of the Country shortly as when common people are making long queue for getting 2000/ or 4000/- before bank's ATM, crores or fresh currency are available as usual for a section involved in crony capitlism. Nothing doing, the system will continue as usual one like it not.
  5. C
    Jan 13, 2017 at 9:44 am
    I'm afraid, your words - as of many others - will simply fall on deaf ears. The RBI Governor has sold his soul to Modi.
  6. P
    Jan 13, 2017 at 10:27 am
    If it is really happening, shame on the part of the RBI and the team heading it.
  7. P
    Jan 13, 2017 at 10:26 am
    shame on the part of the RBI and the people heading the insution which is reputed in the world financial;br/gt;lt;br/gt;lt;br/gt;p v rao
  8. R
    Jan 13, 2017 at 10:27 am
    The article is silly. Such a decision can be taken only by a porly elected Govt , which has been taken. The Govt also has taken it's responsibility. So, any result of this action, good or bad, is of Govt. Govt will either get the benefit or pay as they are answerable to;br/gt;lt;br/gt;Probably IE would be happy, if RBI Governor starts talking to PM on TV or media.Just trying to improve your importance.
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