Mumbai: The Reserve Bank of India (RBI) has been rated the least transparent of central banks in South Asia according to new research published by a US-based economic think tank whose findings are in sync with those of the International Monetary Fund (IMF).
The study, “Central Bank Transparency: Causes, Consequences and Updates”, by the National Bureau of Economic Research, or NBER, has given RBI a score of 2, lower than that awarded to counterparts in Pakistan, Bangladesh, Bhutan and Sri Lanka.
NBER, a non-profit research organization founded in 1920, drew on information available on 100 central banks’ websites, their annual reports and other documents between 1998 and 2006 to reach the conclusions.
Some restraints: A file photo of Reserve Bank of India governor D. Subbarao (left), and deputy governor Rakesh Mohan at the central bank’s headquarters in Mumbai in January. Abhijit Bhatlekar / Mint
The study said the most transparent central banks in 2006 were the Reserve Bank of New Zealand, Swedish Riksbank, Bank of England, Bank of Canada, Czech National Bank, European Central Bank and the Hungarian central bank. The Reserve Bank of New Zealand scored 14 in transparency and the US Federal Reserve 9.5.
The six least transparent banks were those of Aruba—an island in the Caribbean—Bermuda, Ethiopia, Libya, Saudi Arabia and Yemen. In South Asia, Bangladesh’s central bank scored 3.5, Bhutan’s 3, Pakistan’s 4 and Sri Lanka’s 7 in the NBER study, an update of a March 2007 report. While the transparency level in other countries, including those in South Asia, increased over the years, that of RBI remained the same through 1998-2006.
“The trend is general—a large number of central banks have moved in the direction of greater transparency in recent years. The question is whether it will prove durable or be a passing phase. In part, the answer depends on the consequences,” the researchers said.
“In the absence of adequate transparency, suspicion about central bank motives may develop, and pressures to curb the institution’s independence may be irresistible,” warned the study, authored by Nergiz Dincer of the State Planning Organization, Turkey, and Barry Eichengreen, Department of Economics, University of California.
The study’s findings echo those in the Country Report on India published in February 2008 by IMF, which criticized RBI’s lack of transparency. “With regard to the timing of policy signals, the RBI’s approach over the past year has been discretionary,” the IMF study said.
IMF had criticized RBI’s tendency to adjust interest rates between scheduled policy review meetings. It called for increasing the frequency of reviews with pre-announcements of review dates. “Increasing the frequency of policy meetings would reduce the need for such inter-meeting measures, allowing the public to anticipate and prepare for a possible change in policy stance,” IMF said, adding that there was no harm in conducting policy meeting more often. “When announcing the schedule, the RBI should make clear that adjustments in the policy stance will only occur on the pre-announced dates except in exceptional circumstances,” it said.
RBI does not make public the minutes of its technical advisory committee meetings although its counterparts in other countries, including the Federal Reserve’s monetary policy committee, publish such minutes.
The Indian central bank’s committee cannot publish its minutes as it acts as an adviser to the RBI governor and is not a statutory body. It was created as a step towards greater transparency with the ultimate objective of forming a monetary policy committee with voting rights.
In a report published on Monday, a panel set up by RBI said that because members of the technical advisory committee on monetary policy (TACMP) are not appointed on a full-time basis, they cannot be made accountable for decisions taken by the RBI. The report, India’s Financial Sector: An Assessment, was prepared by the Committee on Financial Sector Assessment under deputy governor Rakesh Mohan.
The report says that unlike many inflation-targeting countries, no particular decision, rests with TACMP.
Unlike other central bank that tend to focus on a single policy objective set by the government, RBI pursues multiple and broadly defined objectives including price stability, credit growth, overall growth and financial stability, Mohan said. These objectives are transparently articulated over time, he added.
A draft report prepared by the Committee on Financial Sector Reforms (CFSR), a panel headed by former IMF chief economist Raghuram Rajan, mentioned the Dincer-Eichengreen study of 2007 and acknowledged concern on transparency.
“The Dincer-Eichengreen index involves a judgmental (but careful) assessment of the various elements that go into the construction of the index, so it should not be taken too literally. But it does point to some concerns about monetary policy transparency in India,” the Rajan panel report said. It said RBI should provide more information to the public.
Indian economists were largely unenthused by NBER’s study. Mint spoke to at least five economists over the weekend, but given the sensitivity of the issue, none of them was willing to be identified.
“The outcome (of the survey) is the result of a model. It depends upon what are the factors taken for consideration. Yes, RBI is non-transparent in its own way, but it certainly does not deserve the lowest score,” said one Delhi-based economist.
Some economists say one reason why RBI cannot afford to be fully transparent is possibly that RBI is not just the monetary policymaker, but also acts as the government’s debt manager.