The regrettable mechanics of the recent change of guard at the Reserve Bank of India (RBI) raises some important questions, some long overdue, about the institution’s accountability, transparency and autonomy, and the relevance of having a governor with a strong backbone. The answers to these will decide whether the gain in the RBI’s operational autonomy in recent years is enhanced or becomes stuck, even if it isn’t reversed. In turn, these outcomes have implications for long-term foreign investors.

The appointment of Shaktikanta Das, a competent and trustworthy bureaucrat, as the 25th governor marks the end of a recent reformist shift in government thinking, irrespective of ideology. The new approach internalised that the adoption of modern monetary management in India also favoured individuals with strong macroeconomics- or financial markets-related domain specialist knowledge to be RBI governors. That was viewed as a bonus in dealing with the complex global landscape that the Indian economy is inextricably intertwined with.

However, that bonus never guaranteed personal skills of balanced communication and consultations needed to be an effective governor. Indeed, Das can decide the right balance from the two extreme approaches of his predecessors: One was constructively forthcoming, comfortable with the media, and not shy to express thoughtful views even on topics beyond the realm of central banking, while the other was barely visible, even on important economic matters.

It is unfair to prejudge Das. He’ll have to earn his spurs on the job, like the governors before him. However, the onus is on him to convince all that he isn’t just the government’s bidder in governor’s garb.

It is worth emphasizing that the creator of money in modern banking shouldn’t be the handmaiden of the big political stakeholder-spender. Also, RBI, as the banking regulator, shouldn’t have to bend each time the government, the biggest shareholder of public sector banks and the main cause of their misery, and susceptible to pressure from business groups, orders a dilution of the fitness diet because the patient is whining.

The RBI is always a convenient target, but it isn’t the main reason why growth has disappointed. The government is advised to do some introspection regarding its actions and inactions. The RBI’s accountability should rightfully be to Parliament, or to its properly constituted board. The current composition of the RBI board lacks the core competency and also includes several government nominees and potentially members with vested interests.

The unelected governor should also not be accountable to the democratically elected government. One of the main goals of a central bank is to check the potentially myopic policies of the government in power for short-term political gain that could have adverse long-term economic impact.

Das should also take note of the following: First, differences in opinion will often exist. However, domain specialization doesn’t mean a licence to be selectively accountable, or to switch off the common sense approach to communication and consultation. Equally, governments cannot continue treating the RBI like a vacuum cleaner, to sort out the mess caused by, say, their delayed actions, policy mishaps, or unexpected outcomes of their shoddy implementation.

Second, central banking isn’t a popularity contest. Given the sweeping powers the current RBI Act gives to the government, it is only the strength of the spine of the RBI governor that prevents a government from bulldozing its way through with politically self-serving and reckless initiatives that could compromise long-term economic stability. The legality of an initiative isn’t the final word on deciding if it is responsible and in our long-term interest.

Third, central banks are prone to forecasting errors. This isn’t appreciated by those who don’t have to be accountable for forecasts, or by those blessed with selective amnesia about their own forecasts. Recall that the majority was singing the same worry in October when Brent oil prices were threatening to march towards $90-100 per barrel.

Separately, the RBI should review its forecasting track record and explain the misses to enhance its transparency and credibility. Also, liquidity management is one of the most basic jobs of a central bank. It is worth exploring why the RBI has often struggled with it and done a dissatisfying job of answering the concerns.

Finally, there has to be a greater focus on ensuring sustained macro stability, not just enjoy it as a lucky outcome. India’s growth is frequently interrupted by concerns about macro stability because policymakers rely heavily on optimistic assumptions and insufficient policy buffers. People in government pump up how big the Indian economy will be in 10-20 years, but there is no thoughtful assessment of how to get there.

RBI governors are kept on a tight leash by New Delhi via the typical initial appointment for a mere three years. It is up to Das to become a dove, a hawk, an owl or any other monetary bird, but hopefully not a lame duck.

Rajeev Malik, is a strategist at River Valley Asset Management, Singapore. These are his personal views.

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