The role of a central bank has become a subject of intense scholarship and research in core economic studies as well as financial economics. The ability of central banks to move financial markets, while keeping a steady hand on the tiller of the economy, has made it a pivotal institution that has the attention of traders, bankers, analysts, scholars and industry.
Different central banks have different mandates—with employment, GDP growth, inflation management and systemic stability being common—but what has earned them credibility over the past five decades is their reputation for objective and even-handed economic management.
The Reserve Bank of India (RBI), for example, is expected to keep inflation within manageable limits, foster inclusive growth and development, and maintain financial stability. While it has an explicit inflation target of 4%, with flexibility to let it move two percentage points up or down, the determinants of financial stability have been left fuzzy.
Since this part of the job is left largely to RBI’s discretion, without well-defined parameters or risk variables shared with the public, it should not surprise us if questions and disputes arise. This could eventually be detrimental to its credibility as well as ability to influence markets in times of crisis.
RBI’s stance on non-banking financial companies (NBFCs) has given rise to similar concerns. Its rapidly shifting guidelines on top-tier NBFCs, compounded by its here-now-gone-tomorrow definition of public funds, has created a thicket of rules that obscures policy clarity and engenders confusion over its aims. Worse, it has generated a guessing game about how these policy frameworks impact the fortunes of a single company—Tata Sons, the holding firm of the Tata Group.
Unfortunately, such public perceptions, even if mistaken, can diminish the central bank’s sheen of integrity and fairness. What lends such speculation some credence is how RBI seems to have dragged its feet on a 2024 application by Tata Sons to surrender its certificate of registration, which has inexplicably been in limbo for 24 months.
Ironically, Tata Sons had asked for de-recognition as an NBFC based on the old criteria of a multi-factor scoring model; RBI’s revised upper-layer NBFC guidelines, which follow a new single-factor model, could be viewed as a case of goalposts being shifted while a match is in progress.
As a well respected central bank, RBI is consulted by its global peers on numerous issues. Over the past few years, it has successfully managed to negotiate various tests and tribulations, whether internal or external, with high-quality technocratic solutions and approaches.
However, it would appear unbecoming of RBI to wade into a single-company issue. The central bank’s measures would clearly be justified if Tata Sons’ existence posed a direct threat to systemic stability; this is difficult to conceive of at this point, although Tata Group companies play a significant enough role in India’s economy for the holding company to be considered ‘too big to fail’ in a broad sense.
On current reckoning, and by the same token, many other holding companies—whether their total assets exceed ₹1 trillion or not—would also pose a systemic risk through their direct or indirect access to public funds.
Ideally, India’s central bank should not occupy itself with the future of a single corporate entity at a juncture when the economy faces inflationary impulses, currency volatility and growth uncertainty.