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Business News/ Opinion / The government must let RBI do its job

The government must let RBI do its job

The Indian central bank should have full freedom to make policy choices

Illustration: Shyamal Banerjee/MintPremium
Illustration: Shyamal Banerjee/Mint

Duvvuri Subbarao has not pulled any punches in his memoirs of what happened in his five years as governor of the Reserve Bank of India (RBI). His frank observations about the friction with two finance ministers—P. Chidambaram and Pranab Mukherjee—now brings out into the open what many have known for long. That an equable person such as Subbarao has written about these experiences means a lot.

The revelations come soon after Raghuram Rajan decided not to seek an extension, after being the target of a vicious personal attack on social media by Subramanian Swamy.

Partisans on one side have till now claimed that what happened to Rajan was typical of the current government headed by Narendra Modi. Partisans on the other side will now hit back by pointing out that it was not very different under the previous government either.

It is now important to step away from such senseless social media wars to look at two fundamental issues that matter far more.

First, the Indian political system has not yet fully digested the fact that the central bank has operational autonomy to pursue its legal goals. The 1997 agreement to phase out ad hoc treasury bills as a means to stop the automatic monetization of fiscal deficits, the provision in the fiscal responsibility and budget management law of 2003 that keeps RBI out of primary auctions of government bonds and the overall shift from credit planning to modern monetary policy have increased the freedom of the Indian central bank to make policy choices.

The persistent disagreements between New Delhi and Mumbai on interest rate policy are only the most obvious examples of what has been a wider attack on the central bank over the past decade. It is not that the way RBI operates is beyond reproach, but there is no doubt that the sustained attempts to cut the Indian central bank down to size is at least partly because of petty vindictiveness. Much of the intellectual firepower used by critics in this battle is based on a central banking consensus that lost credibility after 2008.

Second, the broader point is that successful constitutional democracies work through institutions. The government of the day has a popular mandate for five years. Institutions are there for a far longer time. This is something that most politicians just do not get. They believe an electoral victory is licence to tamper with the working of institutions that have legal or constitutional status.

The treatment given to RBI by successive finance ministers is a case in point. Even some of the more sophisticated commentators who have sided with the government in its battles with the central bank do not seem to have understood this plain fact. The political system should set the goals of monetary policy, and appoint the governor, but then RBI needs operational autonomy to pursue these goals unhindered by tinkering from the finance ministry. There was a similar example in financial market regulation as well. Then-prime minister Manmohan Singh failed to protect C.B. Bhave and his senior team at the Securities and Exchange Board when there was intense lobbying by financial market interest groups who were unhappy with the regulator doing his job.

However, there are also two important instances of smooth relations between the finance ministry and RBI since the 1991 economic reforms took India out of the credit planning mindset. The first was when Manmohan Singh was finance minister while C. Rangarajan was governor. The second was when Yashwant Sinha was finance minister and Bimal Jalan was governor. These two relationships were in striking contrast to what has happened over the past decade under two political dispensations.

The bedrock of such cooperation was mutual respect—both in terms of the people involved as well as institutional boundaries. Against this backdrop, finance minister Arun Jaitley should grab the opportunity to reset relations with RBI once a new governor is appointed. The unfortunate tensions of the last decade should not be repeated.

Does the government need to respect the central bank’s institutional autonomy? Tell us at

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Published: 18 Jul 2016, 12:34 AM IST
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