Will RBI remain Independent? - The Honest Truth By Ajit Dayal

Will RBI remain Independent?

16 AUGUST 2016

"At the stroke of today' midnight hour, while the world sleeps, India will awake to life and freedom".

These were the words thundered by India's first Prime Minister Jawaharlal Nehru on the eve of India's Independence from British rule. Ironically, it was his daughter, the destructive Indira Gandhi, that took away India's freedom by suppressing India with an Emergency in June 1977 and - with some of the most idiotic and corrupt policies - took the life out of India's economy for decades! But these thoughts I am about to share with you are not about Indira Gandhi (who should be buried in the history books for her black deeds), though they are about independence: Independence of the RBI.

The Reserve Bank of India has multiple roles to play and has many responsibilities, including:

  1. It owns shares in many PSU banks,
  2. It is supervisor of all banks,
  3. It is a developer of the banking system,
  4. It acts as a lender of last resort to banks during difficult times,
  5. It prints currency notes and detects fake currency notes,
  6. It manages the external reserves of the country and the foreign exchange rate,
  7. It manages and supervises all flows of foreign capital into and out of India,
  8. It sets interest rates,
  9. It helps the government promote financial institutions to further economic development,
  10. It helps transmit government's economic policy into financial action,

That is a lot of work for one institution! Therefore, the top positions are crucial.

As Wikipedia points out:

The Central Board of Directors is the main committee of the Central Bank. The Government of India appoints the directors for a 4-year term. The Board consists of a Governor, and not more than 4 Deputy Governors, 4[30] Directors to represent the regional boards, 2 from the Ministry of Finance and 10 other directors from various fields. RBI wants to create a post of Chief Operating Officer (COO) and re-allocate work between the five of them(4 Deputy Governor and COO).[31][32]

The bank is headed by the Governor and the post is currently held by economist Raghuram Rajan. There are 4 Deputy Governors, Dr Urjit Patel, R Gandhi, S S Mundra and N S Vishwanathan.[33] Two of the four Deputy Governors are traditionally from RBI ranks, and are selected from the Bank's Executive Directors. One is nominated from among the Chairpersons of public sector banks and the other is an economist. An Indian Administrative Service officer can also be appointed as Deputy Governor of RBI and later as the Governor of RBI as with the case of Y. Venugopal Reddy. Other persons forming part of the central board of directors of the RBI are Dr. Nachiket Mor, Y C Deveshwar, Prof Damodar Acharya, Ajay Tyagi and Anjuly Duggal.

Soon - maybe by the time you read this note - the government will announce a new Governor of the RBI.

Reducing the powers of the RBI?

The RBI has its fair share of critics. Economists, think tanks, and governments grumble over the fact that a few men (and maybe women) in grey suits (and dull saris) determine the economic course of a nation with no responsibility for their actions. Some want the RBI to be disbanded and, at the very least, be redesigned as per the recommendations of the FSLRC (Financial Sector Legislation Reforms Committee set up in March 2011) - a move that was initiated by the Ministry of Finance under the Congress and pursued with equal intensity by the Ministry of Finance under the BJP. The agreement between the Congress and the BJP disproves the old adage: my enemy's enemy is my friend. The Congress and the BJP - and presumably other political parties - hate the RBI and probably see it as an irritant in their path to glory.

The reformist view of a weaker RBI is strengthened by the evolution of central banks in the developed world. Over the past decade, the role of central banks in the developed countries has changed. They have got external economists voting on monetary policy and the RBI either plays the role of a bank owner or of a bank supervisor: not both. The reformists also argue that the field of finance and money has grown beyond banks what with the rapid growth in the balance sheets of insurance companies and mutual funds. They rightly point out that India has so many laws written over various periods of time that are archaic in the modern financial age. Hence, the need for a super-regulator, as suggested in the FSLRC.

When one reads the headlines during the Congress regime and the current BJP regime, one gets a feeling that we have Finance Ministers who wish to print, print, and print more money and reduce, reduce, and reduce interest rates to achieve their political goals. No politician has won any election by promising to reduce benefits to the people! Politicians win votes by promising more!

To leave the RBI with little power in the reality of Indian politics will be dangerous.

To have a Governor appointed by the government who could potentially be a yes-man (or yes-woman) to the government will be a dangerous path to tread for a country that is still fiscally imprudent in times of state/central elections (promises of free rice, free laptops, free everything!), lopsided in development and needs, and has a very low taxation base.

To its credit, the RBI has been praised by many sensible economists as one of the finest central banks in the world: from the recent era of DR Reddy through to Dr Rajan. One can argue that the central banks of the western world have become pimps to the financial firms they are supposed to oversee (by supplying the financial firms with bail out loans and cheap capital whenever they want it) and have achieved the distinction of being spineless servants of their political masters (who have already been bought by the financial firms)!

Now visualize the 5 worst chief ministers and politicians in India's today (I know there are more, but let's stay with 5!). ☺

And visualize the 5 most 'croniest' of crony capitalists in India. (Yes, I know we have a million of them, but only 5 please!)

And visualize the 5 most thieving real estate companies which are deep in debt and need a bail out.

And now you tell me whether the RBI should remain independent or not.

That is why the decision of who will be the next Governor of the RBI is crucial and important.

No academic and theoretical think-tank stuff can capture this real and ever-present danger of an India ruled by an elite of the corrupt and the self-serving.

The tenure and direction of India's economy over the remaining term of this government's time in power is 3 years. The next scheduled general election is around May 2019.

The Governor of the RBI will also have 3-year tenure till September 2019.

Together, they can create - or destroy - the foundation for growth years into the future.

May the RBI remain independent and may India prosper from its independence.

Jai Hind!


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Disclaimer: The Honest Truth is authored by Ajit Dayal. Ajit is a Director at Quantum Advisors Pvt. Ltd and Quantum Asset Management Company Pvt. Ltd. The views mentioned above are of the author only. Data and charts, if used, in the article have been sourced from available information and has not been authenticated by any statutory authority. The author, Equitymaster, Quantum AMC and Quantum Advisors do not claim it to be accurate nor accept any responsibility for the same. Please read the detailed Terms of Use of the web site.

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3 Responses to "Will RBI remain Independent?"

rajesh swami

Sep 19, 2016

yes

Like 

chitra nathwani

Sep 13, 2016

Yes

Like 

N Badri Prasad

Aug 19, 2016

The press is making an issue out of non issue. Nothing of such a thing has happened in the past and nothing will also happen in future. I wish the press concentrates on issues of more relevance.

Like (1)
  
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