With various committees constituted by the Reserve Bank of India (RBI) submitting their reports and recommendations, there is a discernible, if not yet decisive, move to change the monetary policy framework.

What is being recommended in these reports amounts to a change not only in the conduct of monetary policy but also the mandate of RBI.

This changes the context of the continued and unending debate on the autonomy of RBI that has been going on for the past three decades.

Until now the context was different. During the period immediately after economic liberalization, the autonomy of RBI meant having adequate headroom for operating monetary policy and giving it some flexibility.

For instance, C. Rangarajan’s strong pitch for greater autonomy of RBI in 1993 was hinged on ending automatic monetization of the government deficit. The change disengaged monetary policy from fiscal policy to some extent. But monetary policy continued to play second fiddle to fiscal policy.

Now the situation is different. Monetary policy is on its way to becoming an independent policy in its own right and not being a set of accommodating variables adjusting to fiscal policy.

All the changes being proposed in the organizing structure, the operating framework and instruments of monetary policy can be dangerous.

It is not inconceivable that the central bank can hijack the entire economic policy agenda set by an elected legislature. Indeed, the early signals are not very comforting.

The virtual acceptance of the Urjit Patel committee report by governor Raghuram Rajan in his monetary policy statement goes beyond matters of propriety.

Or the fact that the Nachiket Mor committee report on microfinance doesn’t even mention the Micro Finance Institutions (Development and Regulation) Bill (2012), which is with Parliament for approval. This Bill covers the regulatory and supervisory aspects RBI will be engaged in.

Similarly, the suggestion of a parliamentary panel that RBI should not grant new banking licences to companies as the banking business is highly leveraged and involves public money, hasn’t even as much as got a reaction from RBI.

Are these cases of simple oversight or are these straws in the wind of pre-empting Parliament? RBI cannot and should not be seen to operate in a world of its own without due regard and recognition of what Parliament is doing or what the legislature is engaged in.

At the other end, there are serious conflicts in the existing system. The biggest one, between proprietary and regulatory issues, is that the “owner" of three-fourths of the banking system controls the “regulator".

Of the 15 RBI directors, apart from appointing the five official full-time directors—the governor of RBI and its four deputy governors—all the 10 non-official directors are nominated by the government.

While it may not have happened so far, the fact is the government can dismiss the RBI governor and his four deputies without even assigning a reason.

All these are legacies of the RBI Act of 1934 that was drafted in the colonial context of distrust and suspicion of RBI.

The simple point is that the situation has changed and warrants a reconsideration of the way RBI is governed; the governance aspects of the central bank must now be scrutinized carefully.

There has to be direct and specific focus on the governance framework needed to deliver the new mandate without jeopardizing the system.

Pending a new RBI Act, reflecting all the developments in the financial and monetary sectors since 1934, there is a need to put in place a governance structure.

The only way to prevent RBI from either being a pooch or becoming a policy guerilla is a robust governance framework.

That does not mean establishing a three-member monetary policy committee in the central bank. Indeed, in the current context it will give the government a handle to interfere more because it will influence the appointment of the committee members.

The starting point for a new governance framework can be the idea mooted by former governor D. Subbarao of going before a select committee of Parliament in an open manner as in the US and the UK to make regular presentations on the state of the economy and monetary policy.

As in the case of the US Federal Reserve, where the board is nominated by the President and approved by Senate, the RBI board must have a wider approval and consensus.

After the precedent set up in the appointment of the central vigilance commissioner and the Lokpal, the appointment of the RBI governor should be a unanimous decision by a committee consisting of the Prime Minister, the finance minister and the leader of the opposition.

Before changing policies or the mandate that it has, RBI will do well to focus on restructuring the institutional and organizational setting in which it is going to pursue its “new monetary and financial policy", not the policies themselves.

Haseeb A. Drabu is an economist, and writes on monetary and macroeconomic matters from the perspective of policy and practice.

To read Haseeb A. Drabu’s earlier columns, go to www.livemint.com/methodandmanner-

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