“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).
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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.
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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.
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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.
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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.
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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.
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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.