Active Stocks
Fri May 24 2024 15:59:27
  1. Tata Steel share price
  2. 174.80 -0.37%
  1. NTPC share price
  2. 374.85 0.68%
  1. State Bank Of India share price
  2. 828.60 -0.45%
  1. ITC share price
  2. 436.10 -1.16%
  1. Power Grid Corporation Of India share price
  2. 318.50 -0.39%
Business News/ Opinion / Online Views/  Opinion | Revisiting accountability at Reserve Bank of India

Opinion | Revisiting accountability at Reserve Bank of India

It makes sense to consider an accountability framework for RBI regulatory decisions so that it doesn’t take the blame for being arbitrary with its decisions

The problem isn’t accountability of RBI but the government’s lack of clarity in setting objectives. Photo: Aniruddha Chowdhury/Mint (Aniruddha Chowdhury/Mint)Premium
The problem isn’t accountability of RBI but the government’s lack of clarity in setting objectives. Photo: Aniruddha Chowdhury/Mint (Aniruddha Chowdhury/Mint)

“The most independent central bank is not likely to be a socially optimal central bank," economists Guy Debelle and Stanley Fischer wrote in a paper titled How independent should a central bank be?Fischer is a former vice chairman of the US Federal Reserve and was professor of economics at Massachusetts Institute of Technology when the paper was written in 1994. Earlier, Kenneth Rogoff, professor of economics at Harvard University, had suggested that a central bank can be too independent to be socially optimal.

While these comments were made in relation to monetary policy, the sentiment they represent will echo with critics of Reserve Bank of India (RBI).

ALSO READ | The political economy of central bank independence

The central bank’s assertion of its independence is being used as a garb to avoid accountability, they say, adding that too much independence is leading to socially sub-optimal outcomes. Besides, critics say that RBI’s regulatory decisions are often arbitrary, and the fact that they can’t be appealed at an appellate tribunal makes things far worse.

It’s useful then to ask the question whether the central bank is far too independent, and if so, how its accountability can be improved.

ALSO READ | This ugly fight for the central bank is hurting India

From the looks of it, the government appears to be revisiting the accountability aspect of RBI. News reports suggest that it is seeking to rein in the central bank by insisting on greater accountability to the RBI board, which has a number of government nominees.

To start with, the idea that the RBI board is the right place to ensure accountability is highly debatable. As pointed out here, one of the demands of the government is that the central bank eases restrictions on lending by government-owned banks.

ALSO READ | Getting the RBI and government to sit at the table

The restrictions have been placed because these banks are under-capitalized. Since the government owns these banks, there is a clear conflict of interest, if its nominees bat for easier rules. As such, reports that the government and its nominees may insist on policy decisions at the next RBI board meeting are troublesome.

As things stand, one big area where the central bank gives a clear account is with regards to its government-given mandate of inflation-rate targeting. The expectations on this front have been passed as law, and there are clear guidelines on what needs to be done if the targets are not met.

ALSO READ | Dear govt, RBI income is not meant for your expenses

If the government now has a different view that the central bank should focus not only on inflation, but also growth, then the problem isn’t one of accountability, but of lack of clarity in setting objectives on its own part.

Besides, the central bank gives an account to parliamentary committees multiple times in a year. But critics rightly point out that giving an account to India’s parliamentary committees is a far cry when compared to Senate hearings in the US, where committees are equipped with greater resources such as their own secretarial staff. There is clearly room for this process to improve, although the onus for this again doesn’t lie with the central bank, but with the government.

ALSO READ | RBI is from Mars, finance ministry is from Venus

An area for improvement at the central bank is with regards to being accountable for its regulatory decisions. When regulated entities have a grievance with Securities Exchange Board of India (Sebi), they can approach Securities Appellate Tribunal (SAT). Often, SAT has given a rap on Sebi’s knuckles, which has inevitability led to greater care by the regulator while writing orders and passing judgements.

There is no such mechanism for the central bank—any appeal ends up with a committee or an employee of the central bank. Going to the courts is a suboptimal solution, compared to an appellate body that has sector expertize.

ALSO READ | Why #RBIvsGovt is a viral storm in a tea cup

As long as the current structure exists, RBI will take the blame of being arbitrary with its decisions. Worse still, in episodes such as the current spat with the government, it will have few friends because of this perception of being far too independent.

It makes sense to consider an accountability framework for the central bank’s regulatory decisions, so that regulated entities have the comfort of knowing that decisions taken wouldn’t be arbitrary and can be appealed at an appropriate forum.

As far as giving an account for its macro-economic management, the government should consider strengthening existing structures, as well as being clear about the objectives it has in mind for the central bank.

You are on Mint! India's #1 news destination (Source: Press Gazette). To learn more about our business coverage and market insights Click Here!

Catch all the Business News, Market News, Breaking News Events and Latest News Updates on Live Mint. Download The Mint News App to get Daily Market Updates.
More Less
Published: 15 Nov 2018, 02:42 AM IST
Next Story footLogo
Recommended For You