The governance of Reserve Bank of India
If the central bank’s board rubber-stamped the currency exchange decision, it is clear then that RBI’s autonomy has been compromised
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In a recent interview I had with Y.V. Reddy, a former governor of Reserve Bank of India (RBI), about financial inclusion, the first observation he made was: “The RBI board has representatives from agriculture, social services and even scientists. Most central banks are monetary authorities packed with economists. RBI is not just a monetary authority worried exclusively about issues of inflation, but much beyond.”
RBI not only has a central board, but also has four regional boards. The regional boards are required to look at issues that come up in the respective regions, and deal with local financial institutions like cooperatives. The chairs of the regional boards are on the central board. In addition to these four people, the Union government nominates 10 more directors on the central board. In the past, the incumbent board member would continue beyond his or her term till the new board was appointed, ensuring that there was no void, even if there was a delay in fresh appointments. This was changed to put a hard stop to the term of the board member irrespective of whether a replacement was found. Thus the RBI board started having vacancies.
Typically, a board member could serve up to two terms of four years each, though Y.H. Malegam exceptionally served many more terms, and deservedly so. The people on the central board of RBI—though appointed by the Central government—were people of eminence and independence. We have had Y.C. Deveshwar, Azim Premji, Kumar Mangalam Birla (who resigned when the group applied for a banking licence), G.M. Rao, who brought the perspective of business; Kiran Karnik, who brought in a public policy perspective; Dipankar Gupta, A. Vaidyanathan, Indira Rajaraman, who brought in diverse academic perspectives and people like Amrita Patel, Ela Bhatt and Shashi Rajagopalan, who brought in the perspective of peoples’ organizations and civil society. These are names of people who were on the central board in the last three terms. In addition, even the regional boards had people of diverse backgrounds and people of no less eminence than M. Govinda Rao.
The composition of the central board, as Reddy points out, shows larger concerns, beyond inflation and monetary policy, because RBI policies usually have much larger ramifications. The central board of RBI, in the past three years, is shrinking. There have been no new appointments to the local boards in the current National Democratic Alliance regime. The last appointment to a regional board was that of Nachiket Mor, who was appointed chair of the board of eastern region by the United Progressive Alliance-II. All the positions of all the local boards except that of Mor have fallen vacant and have not been filled up. Even in the eastern regional board, Mor is the lone member, and it is safe to presume that these one-man meetings may not be happening. So, much for hearing the decentralized voices!
Thus, we have one representative from the local boards on the central board as against four positions. In the central board, everybody appointed by the previous government has demitted office. The current government in its tenure has made only three appointments to those 10 positions and the rest have remained vacant for a very long time. In addition, one position on the board from the side of officials—that of a deputy governor is also lying vacant after Urjit Patel assumed governor’s office. Thus, the RBI is operating with less than half of its board size; and less than a third of its size for independent members.
The gazette notification that withdraws the legal tender status in the preamble states that the decision of the government has been on the recommendation of the central board of directors of the RBI. This is a very important decision that is affecting the economy as a whole and also brings to the fore, the capability, trust, reputation of the central bank. A decision of this nature should have been accompanied by at least a document laying out the road map and must have been discussed in a meeting which could have lasted for hours. The question is, did this recommendation to the government happen after due deliberations within the central board of the RBI? Were the views of all the board members heard? Were they recorded? And was this a unanimous decision? In any case, how fair is it for a board having four independent members and six executives (representing the RBI and government) to take a call on such an important economic and social decision when the expected structure is to have 14 independent members and seven executives? Does the current constitution, of six officials and four independent members, represents the spirit of how the board was expected to be constituted?
It is not clear from the public domain if there was a special meeting of the central board called for discussing the withdrawal of legal tender issue. Given the nature of secrecy, we assume that a special meeting was called. The question is, whether this decision actually emanated from the inputs that RBI received, deliberated within about the ramifications and then recommended to the government? From what we have seen in the discourse, this was a decision of the prime minister only, implemented by the RBI. The decision of the central board to recommend withdrawal of the legal tender status possibly did not emanate from due process within the central board of RBI. The board did not have enough time to deliberate on the important issue and offer counsel.
If secrecy was of prime importance, and the decision was that of the prime minister and the central board rubber-stamped the decision, then it is clear that the autonomy of the RBI has been compromised at the highest level on one of the most important decisions. Secrecy cannot be a foil for breaking down the governance structures. If indeed this decision was of the government, there must have been alternative legal routes in which the government could own up to this decision, like promulgating an ordinance as was done in 1978.
RBI is a classic case of minimum governance maximum government, exactly the opposite of what the honourable Prime Minister—when he was a candidate—promised.
M.S. Sriram is faculty member, Centre for Public Policy, Indian Institute of Management, Bangalore.