The Reserve Bank of India (RBI) entered its 75th year on 1 April.
RBI governor D. Subbarao made a valid point in a 2 April address to staffers: “There will be events of celebration, but I am anxious that this must go beyond mere discrete events of celebration. The platinum jubilee must launch a series of initiatives and activities that make RBI a more responsive, relevant, professional and effective public policy institution…”
Illustration: Jayachandran / Mint
There are three tasks worth considering for the future.
First, what should RBI really be doing? Its original mandate was broad and flexible, as Subbarao said: “…to regulate issue of bank notes, to keep the reserves with a view to securing monetary stability in India and generally to operate the currency and credit system of the country to its advantage”.
The bank has done well to stick to this eclecticism, even in recent years when global central banking fashion dictated a single-minded focus on inflation control. What was once sneered at as conservatism of an institution is now grudgingly admired as prudence. RBI’s focus on not just low inflation, but also on financial stability, equity and real estate prices, the availability of bank credit and exchange rate fluctuations, has served India well.
Second, how should RBI deal with the government? Very warm relations between a government and a central bank are rare—perhaps rightly so. The record has been mixed in India. There have been differences of opinion between Mumbai and New Delhi, from the clash between governor Benegal Rama Rau and finance minister T.T. Krishnamachari in the 1950s to the more recent disagreements between Y.V. Reddy and P. Chidambaram.
RBI has occasionally held its ground, but there have also been large stretches of time when it has buckled under pressure, especially when it has been used as a printing press to finance huge deficits. We are in a similar situation right now, with the euphemistic debate on fiscal stimulus and quantitative easing. RBI must stand up to the government in such times.
Third, there is the question of transparency. RBI has done a poor job of telling market participants and economists what it is trying to do, which does not help monetary transmission. Nergiz Dincer and Barry Eichengreen have shown in their research that RBI is one of the least transparent central banks in the world. This is something Subbarao and his successors will have to come to terms with.
What are RBI’s future challenges? Tell us at email@example.com