Home / Opinion / Getting the RBI elephant to dance

The New Year missive sent by Reserve Bank of India (RBI) governor Raghuram Rajan to the employees of the central bank is an overdue call for organizational change. Rajan has mentioned the presence of time servers who barely do what is expected of them as well as the general lack of curiosity among many members of the staff. He has also said that a culture of complacency and self-satisfaction will lead to a slow descent into mediocrity.

These words should not come as a complete surprise. Rajan has been talking for quite some time about how the internal culture of the central bank needs to be overhauled. He lost his initial battle to appoint a chief operating officer who would pull the organization up by its socks. But he has since then reorganized his staff into five clusters: monetary policy and research; regulation and risk management; supervision and inclusion; financial markets and infrastructure; human resources and operations. Such clusters need to be necessarily manned by trained specialists if they are to succeed.

Few realize that the RBI is far slimmer than it was at the peak of Indian regulatory socialism. Its headcount has come down from 35,500 in 1981 to 16,700 today. But this slimmed-down RBI needs to become a place where talent is nurtured, knowledge is advanced and capabilities are strengthened. It is now operating in an environment that it cannot tightly control as in the past. Most interest rates have been decontrolled, the exchange rate is no longer fixed by fiat, global events have deep effects on India, financial market innovations are one step ahead of regulations, the tools of risk assessment have become more sophisticated, financial inclusion is a big challenge, and new developments such as the growth of digital money are on the horizon.

One example of what all this means is seen in the field of monetary policy. The RBI has now switched to a new inflation targeting framework. It needs to develop new macroeconomic models to help it forecast inflation with more precision. It needs to better understand the process by which inflation expectations are formed. Its survey methods are crying for change. It needs to develop a better understanding of the feedbacks from the financial markets into the real economy.

The central bank has a talented bunch of economists doing monetary policy, but there is no doubt that it needs more intellectual capital. The RBI has had two major episodes when its economic research was bolstered: first in the late 1940s when C.D. Deshmukh was governor and then in the mid-1980s when C. Rangarajan was the deputy governor in charge of monetary policy. The bar needs to be raised in the other clusters that Rajan has created within the central bank.

It is by no means an easy task. Most organizations fall prey to inertia as the decades go by. The private sector is disciplined by the market. Regulatory organizations have to create their own internal discipline. Rajan should by now be aware of the power of public sector unions, so he will have to manage the transition carefully. In this context, there is still a strong case for bringing in a chief operating officer, but being ready with the legal requirements this time around, compared to the strategic blunder made last time.

The RBI insiders say that a lot of bright young people who join the central bank tend to leave it in a few years as they realize that promotion is not linked with capabilities. On the other hand, getting in lateral entries is a massive battle even at the best of times. That leaves an organization where talent is scarce. There is good reason for Rajan to be worried.

The RBI continues to be one of our most credible public institutions. The central bank has been attacked over the past few years for its failure to keep a lid on inflation even as there have been attempts to whittle down its powers. Successive governors have fought to defend the RBI’s turf and reputation. But its best defence would be to emerge as a meritocratic organization that does its job well—and more.

Will organizational change in the central bank bring about more efficiency? Tell us at

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