YV Reddy, Bimal Jalan stoke debate on steady erosion of RBI autonomy

Interventions by the two former RBI governors come at a time when concerns are being expressed that govt rode roughshod over RBI with the demonetisation move


Former RBI governors YV Reddy and Bimal Jalan.
Former RBI governors YV Reddy and Bimal Jalan.

Mumbai/New Delhi: Two former Reserve Bank of India (RBI) governors have in the span of two days stoked a debate on the eroding autonomy of the central bank.

The first was Y.V. Reddy, who, in an interview to CNBC-TV18 on Monday, said that over the years, RBI’s autonomy had been eroded and that recent criticism by global rating agencies now threatens to compromise the central bank’s hard-earned reputation.

Part of the reason for this, he argued, was that RBI has mistakenly been equated with other regulators even while it has fundamentally different functions.

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On Tuesday, Bimal Jalan joined the debate and said the autonomy of RBI was sacrosanct.

“The autonomy of the RBI—that is a very fundamental fact and we have to maintain it and I hope the government would give attention to that part also,” said Jalan, also in an interview to CNBC-TV18.

Jalan served as governor from November 1997 to September 2003.

Reddy, who succeeded Jalan, held the position until September 2008.

The interventions by the two former governors come at a time when concerns are being expressed in some quarters that the government rode roughshod over RBI while demonetizing high-value currency notes.

The initial suggestion to demonetize Rs1,000 and Rs500 currency notes came from the government. To be sure, RBI’s board signed off on it before the public announcement by the Prime Minister on 8 November.

ALSO READ | RBI autonomy has to be maintained: Bimal Jalan

In his interview, Reddy pointed out that the erosion of RBI’s autonomy had been happening for some time. “It (devaluation of RBI) cuts across political affiliations.”

The former governor pointed out that RBI is a full-service central bank—implying it is in charge of monetary policy decision making, currency and debt management and regulating the banking system.

An RBI spokesperson didn’t reply to an email seeking comment.

RBI insiders and some central bank watchers believe that RBI’s autonomy and its authority are indeed under siege, but agree with Reddy that this dilution of powers preceded demonetization.

“While the autonomy deals with the RBI’s powers to set monetary policy rates, its authority is with respect to debt issuance, currency issuance and regulating the banking sector,” said a former deputy governor on condition of anonymity. “The authority was being challenged due to attempts to create a separate debt management agency and an independent payments regulator. The autonomy is being challenged by the inflation targeting framework.”

According to Indira Rajaraman, independent economist and a former member of RBI’s central board, demonetization differs from previous attempts at divesting important functions of RBI in that it has deeply eroded the central bank’s role with respect to its function of currency issuance.

“Provisions in the RBI Act were disrespected and no attempt was made to at least show that the initiative for such an action came from RBI,” said Rajaraman, a Mint columnist.

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Others disagree.

Ajay Shah, a professor at the National Institute of Public Finance and Policy, pointed out that Section 7 of the RBI Act empowers the government to give directions to the central bank governor in matters of public interest.

According to Shah, the only areas where there is a need to keep the government out are when the regulator is issuing a licence, investigating someone or setting policy rates.

Beyond autonomy, there’s a larger issue involved when it comes to RBI governors, said V. Anantha Nageswaran, an independent financial markets consultant and Mint columnist.

“As with all public servants, the serving of the public good is the yardstick that he or she has to use in deciding whether to express or withhold dissent. That is purely a personal judgement. Others may come to different conclusions.”

Gyan Varma in New Delhi contributed to this story.

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