Urjit Patel needs to save reputation of RBI which demonetisation damaged

Transparent, accountable and effective institutions are essential for a successful and vibrant democracy. But, under the Narendra Modi regime, the "Octopus" of the PMO has been so tight that it is not allowing the institutions to rise high.

Ever since the demonetisation decision was announced by the Prime Minister on November 8, 2016, a serious question mark has been raised not only on the operational management but also on the autonomy and identity of the Reserve Bank of India (RBI). The central bank was established in 1934 with a purpose and the purpose was to provide an independent and autonomous body  that will ensure financial and monetary stability.

The RBI Bill was debated fiercely in the Legislative Assembly for nearly a fortnight and a large portion of the debates were devoted to ensuring independence and autonomy of the body so that it can judge things purely based on financial prudence and will not be led away by the government or any political party or so on.

The RBI was set up as an institution that will be free from political influences in its decision-making. Even the London Committee report which examined the Bill before it was considered by the Assembly stated, “Once the central bank will be set up on non-political lines, it would be an independent bank to which India could look to act merely in the interests of India and considering nothing else”.

Beginning late evening of November 8, 2016, government functionaries have dominated the demonetisation scene with the RBI largely reduced to an entity whose job is to only notify what is already there in public domain. As issuer of currency, upholding faith and trust of people is important for the RBI, but by issuing numerous circulars, on a daily basis, creating confusion, it has lost the earlier confidence people had on the central bank.

It is a matter of pity that the RBI governor has to appear before a parliamentary committee to explain the rationale and repercussions of a decision taken at a political level. But, demonetisation was such an obscure decision between the government and the RBI that either the prime minister or the RBI governor can throw some light.  

The governor himself has told the parliamentary standing committee on finance that Rs 500 and Rs 1,000 notes were scrapped on the recommendations of the central government. If it was so, then there was violation of the provisions contained in Section 26 of the RBI Act, 1934, the clause invoked by the government and RBI for demonetisation. As per Section 26, central government can issue notification for scrapping of notes on the recommendations of the Central Board of the RBI.

The RBI has gone with its tusk, trunk and tail. Being the guardian of sovereign currency and the only authority mandated and equipped to respond on the details of demonetisation, Urjit Patel has to answer a lot.

Voices of resentment within the institution and outside from former governors that institutional identity of the central bank has been compromised speaks a lot about the loss of credibility of the RBI post-demonetisation. Institutional reputation of the central bank is a key parameter for foreign investors to invest in a country and a dent in it has the potential to affect investors’ sentiment.

If the disturbing reports by credit-rating agencies are to be believed, dilution in the autonomy of the RBI has affected the image of India as an investor-friendly destination.

The RBI could have exercised its right of independence by examining the recommendations it received from the government on demonetisation and accordingly a judicious decision could have been taken.

It has the mandate to say "no" to the government. By doing so, the RBI could have saved not only the lives of more than 100 persons who died in queues and jobs of the millions, but also the autonomy of the institution which is paramount.

Instead, the Central Board of the RBI succumbed and gave a go-ahead to the political decision of the central government, leading to the biggest disruption in the country’s financial system in the history of independent India.

Of course, the government has effective means of expressing its views but cannot impose conditions on the central bank.

Erosion of autonomy of the Reserve Bank is not only a financial and commercial concern but a national consternation. Banks, especially central banks such as the RBI, should be free from political pressure and they should be conducted solely on the lines of prudent finance.

The Reserve Bank of India has the same powers and authority like the central banks of most of the countries. The challenge before the RBI is to repair the damage which has been caused to the great institution by upholding the independence and autonomy it has been mandated with.

Patel should carry forward the legacy left by governors of repute such as Bimal Jalan, YV Reddy and Raghuram Rajan. It should not be forgotten that besides the foresight of and swift economic decisions by the UPA government, a strong central bank was a critical reason why India could successfully withstand the global economic recession when even large economies were tumbling down.

The central bank has to perform duties which are as intricate as they are vital to the well-being of a country. It must be in a position to control, without competing, the conduct of every bank in public interest and accordingly it has been given powers to ensure that control.

The RBI works under certain safeguards, but at present it has been exposed to the vulnerabilities without the safeguards.

The Modi government has been lackadaisical in appointing non-official directors to the RBI Central Board, which has led to many vacancies in the board. It is reminding us of the pre-independence era when there was a genuine fear of political influence through mechanisms like appointment of pro-British officials. These non-official vacancies in the Central Board should be immediately filled up. It will add to institutional strength of the RBI. 

As the bankers’ bank, the RBI must have control over its policies and it should justify its existence by serving national interest, and not catering to political aspirations of a regime.

Also read: Why RBI, Modi government can't answer for demonetisation