The inordinate delay in naming the next governor of the Reserve Bank of India (RBI) does not reflect very well on the government. Y.V. Reddy is due to retire next week. There was no decision till at least Thursday evening on his successor — or whether Reddy would in fact get an extension.
Illustration: Jayachandran / Mint
This dithering reminds us of a similar episode in another Asian country. Japan’s two main political parties could not agree on whom to appoint as the next governor of the Bank of Japan, and that too, in the early part of this year, when the global economy was reeling from the shock waves of the credit crisis.
The Indian and Japanese examples are similar in one respect and quite different in another. The similarity comes from the fact that these are challenging times for India as well, thanks to inflation being at a 13-year high. The difference is that India’s central bank chief is not selected through a bipartisan political process; the decision is largely the Prime Minister’s.
Such delays can unsettle markets. The credibility of a central bank should ideally be independent of the man at the top; but that is not so in reality. Markets tend to listen to governors rather than the central banks they lead.
The delay has not harmed RBI’s credibility because the financial markets are not well developed in India. But that will change as the economy matures, and equity, bond and currency traders are likely to be spooked by the prospect of a lame-duck central bank. Some believe that the way the governor is selected should be changed, by broadening the group that makes the choice to include others such as the leader of the opposition. But Japan’s example shows it’s not a solution in itself.
It is unclear why this delay has taken place. Reddy and the government (especially the finance minister) have disagreed on interest rates and financial sector reform. The first disagreement dissolved once inflation crossed over into double digits. The government now backs RBI’s tight money policy.
That leaves financial sector reforms. There is a growing belief that the government is keen on someone who is less cautious about opening up the financial sector, which Reddy refused to do at the same pace that many official committees have recommended.
Appointing a central bank governor is a political decision in most countries, and India is no exception. But leaving it till the very last moment is really in nobody’s interest.
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