A 146;70s mindset

The RBI governor8217;s irresponsible statement about looking at ways to control foreign investment in India and subsequent damage control b...

The RBI governor8217;s irresponsible statement about looking at ways to control foreign investment in India and subsequent damage control by the finance ministry indicates that the RBI is out of sync with government policy. On the one hand, India has painstakingly been removing one impediment after another to foreign investment and, on the other, it is saddled with the RBI, an institution that remains steeped in the 8217;70s mentality of controls and licences. The RBI is today one of the last big bastions of the control raj. In the name of market stability, it has managed to keep away from public debate, important issues of public policy like the exchange rate policy, capital controls and issues of monetary policy.

The episode reiterates the need to re-think and re-examine the functions of the RBI. It also suggests that while central bank independence may be a good thing when it is only a monetary authority, as in many other countries, it is not a good thing when the central bank has been given other important responsibilities as in India. The RBI is not merely the monetary authority, it is also in charge of exchange controls, banking regulation and public debt management. An autonomous central bank, which the RBI is, despite being technically under the finance ministry, can be dangerous if it is not accountable to Parliament. Not only was the RBI governor8217;s statement out of sync with the direction of Indian economic policy through which the country has sought to remove controls where ever possible, it was clearly not the consensus within the government, as the FM quick clarification clearly highlighted.

As India globalises, the conflicts between an organisation wanting to maintain its turf and have a hundred handles of control and a dynamic and growing real sector will worsen. The government must relieve the RBI of its cumbersome responsibilities like exchange management, banking regulation and public debt management. Only after that can India reap the full benefits of having an independent central bank.