William Greider once described central banks as secretive temples in a book that was a stinging but ill-informed attack on the US Federal Reserve under Paul Volcker. But the analogy is apt even after all the fashionable talk about central bank transparency.
It is fascinating to see the head priest of the local temple trying to change this culture. Asked to identify three things he would like to achieve in his first three years at the helm, Reserve Bank of India (RBI) governor D. Subbarao said in a recent interview with Central Banking Publications that he would like RBI to “acquire greater proficiency in managing monetary policy in a globalized context”, try to improve communication “at both technical and non-technical levels” and “demystify the office of the governor”.
Illustration: Jayachandran / Mint
That last goal is especially interesting and offers us some insights into the mind of India’s central banker. What Subbarao said to elaborate his point is blunt and honest: He wants RBI staffers to know that governors do not know everything, and make judgements based on a context of uncertainty. “I want them to understand that they will serve me better by disagreeing with me and telling me what to do rather than trying to outguess me,” said Subbarao.
This is something that economists at the central bank should understand. After all, it is known that economic agents have imperfect and tacit knowledge, and take decisions under conditions of radical uncertainty. That is why we need organizations and markets to coordinate decisions. You do not have to be a Hayekian to realize this.
And a central bank governor is just one special type of economic agent.
Whether Subbarao manages to change the culture at RBI over the next three years will be worth watching. As is evident in an answer in the same interview, he knows that unlike in government, the buck stops with one man—the RBI governor—in monetary matters. Such concentration of responsibility will mean concentration of power.
Subbarao’s predecessors left their varied imprints on RBI. C. Rangarajan introduced the tools of modern monetary management. Bimal Jalan buried monetarism and chose an eclectic mix of goals and tools. Y.V. Reddy showed that central banking in an open economy is a complex task even as he tested the limits of independence from the finance ministry.
Will an internal cultural revolution be Subbarao’s great contribution?
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