Governor and governance

The relationship between RBI governor and the government has to be healthy, collaborative and mutually respectful.

Written by Usha Thorat | Updated: June 22, 2016 12:09:28 am
RBI, RBI survey on Indian Economy, Indian economy, Gross Value Added Indian Economy, Indian Economy growth, Indian Economy growth fore cast, India Economy, Indian Economy future, Indian Economy news, Business news, Economy news, India News, National News, Latest news The selection of the governor and the role of the RBI are inextricably connected.

The Reserve Bank of India has been singularly fortunate in being helmed by very competent governors of high integrity and stature. The selection process repeatedly ensured that the appointee did the office full credit. Now that the present governor has confirmed he is returning to academia when his three-year term ends in September 2016, it is perhaps apposite to reflect on the key public policy issues involved in the appointment to this office.

The selection of the governor and the role of the RBI are inextricably connected. The central bank is the primary arm of the government to ensure good monetary and regulatory policies for the welfare of the people of the country. As such, the central bank cannot be fully independent of the government. The governor as the head of the central bank is, and has to be, appointed by the executive organ of the government, namely the appointments committee of the cabinet.

Post the north Atlantic financial crisis, it is now well understood internationally that the central bank’s role in the economy goes beyond monetary policy and extends to growth and financial stability, as the RBI has always practised. The relationship between the executive and the central bank needs to be like a well-managed joint family — with sound, though at times uncomfortable, advice coming from the latter. The central bank, primarily responsible for maintaining internal and external values of the currency, has a long-term horizon. It is also well recognised that the central bank’s role is not just equal to any financial sector regulator. In the public eye, and in fact, the governor has a unique role in the economy. This is also borne out by the international experience.

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In a developing country, and indeed in any country, there has to be healthy, collaborative and mutually respectful relationship between the government and the central bank governor. The latter has to take into account the priorities of the government and the former has to recognise the dharma of the central bank. The selection of the governor has to, therefore, derive from the role of the office in the system.

The process of selection involves three questions: Who will select, what kind of a person, and for how long? Taking the tenure first, international experience generally recommends a term for the governor longer than the term of the body with the predominant influence on the appointment. In the US, the Banking Act of 1935 stipulates that the president appoints the seven members of the board of governors. They must then be confirmed by the senate and serve for 14 years.

The nominees for chair and vice-chair may be chosen by the president from among the sitting governors for four-year terms, these appointments are subject to senate confirmation. The Bank of England governor serves for a period of eight years, the deputy governors for five years, and the non-executive members of the court of directors (as the board is called) for up to four years. A survey of central banks the world over finds that if the term is fixed, it is often around five years. In India, most governors have been given a tenure of five years although in many cases the initial tenure was for a shorter period. Having a period shorter than five years does not allow the governor sufficient time to implement his/her agenda and it also needlessly politicises the extension of the tenure. It is best to extend a five-year tenure to the governor and deputy governors.

What should be the qualifications for appointment? The governor should have sound background of economics, operational experience in public policy and a proven record of performance. The person should have impeccable integrity, reputation and stature befitting the position of the RBI governor. He/she should not hesitate to give his/her professional unbiased advice on monetary and financial matters in the interest of the economy.

What should be the process? There could be two situations: One, where the present incumbent is eligible for reappointment and is willing to be considered for such extension. The other is when a person has to be appointed afresh. In the first case, as the track record of the incumbent is known, the only criterion should be whether the government is inclined to grant such extension based on the performance. Instead of being a last minute decision, this should be undertaken sufficiently in advance and announced publicly. In case a five-year term is given and the incumbent is to be reappointed, that too should be done in advance.

In a situation where the person is to be appointed afresh, the Financial Sector Legislative Reforms Commission suggests an expert panel that should be the same for all regulators. It should have two government representatives and three outside experts with the government representative as chair. Having an expert panel of this nature where the members are at a level not commensurate with the stature and reputation of the governor, is not desirable and not consistent with international practice. An alternative could be a blue ribbon committee with a few former governors and finance ministers making the recommendation with the government, of course, taking the final call.

The selection of the governor has to be as sacrosanct as the function of the office itself. It must add to the respect and credibility that a central bank must have for effective functioning.

The writer served as deputy governor, Reserve Bank of India

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