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become a tug of war between secur- double-digit inflation, a war on infla- ence, the Reserve Bank participated in
ing stability and inflicting misdirec- tion and inflationary expectations, was short-term Treasury Bill issuances of
tion; daily operational decisions lead finally launched in September 2013 by the Government of India (bearing ex-
to power struggles; and, as the central the then Governor Raghuram G Rajan; traordinarily low interest rates) to fund
bank is forced to bend over backwards the Urjit Patel Committee Report to its fiscal deficits. The Reserve Bank also
to retain credibility in the face of immi- Revise and Strengthen the Monetary publicly acknowledged that its open
nent pressures that would erode its in- Policy Framework was released in market operations (OMOs) were pri-
dependence, counter efforts to reduce 2014; and, finally, the Reserve Bank of marily geared to manage the govern-
its independence escalate. As this dy- India Act was modified in August 2016 ment bond yields. This implied that the
namic plays out, markets watch keenly, to constitute the Monetary Policy Com- central bank balance-sheet was always
and if uncertainty grows and confi- mittee (MPC). The MPC consists of three available as a resource — just like tax
dence in central bank independence RBI members, including the Governor receipts — ready to monetise excessive
and credibility erode, then markets rap who reserves a casting vote, and three government spending.
bond yields and exchange rate on the external members appointed by the
knuckles! The market can discipline the government. The MPC has been leg- Challenges before RBI
government not to erode central bank islatively awarded a flexible inflation- The independence of the Reserve Bank
independence, and it can also make the targeting mandate of achieving 4% can still be maintained by regulation of
government pay for its transgressions. consumer price index (CPI) inflation in the public sector banks. One important
Interestingly, the market also forces the medium term, while paying atten- limitation is that the Reserve Bank is
central banks to remain accountable tion to growth, with operational inde- statutorily limited in undertaking the
and independent when it is under gov- full scope of actions against public sec-
ernment pressure. tor banks (PSBs) — such as asset divesti-
ture, replacement of management and
Independence of RBI Sweeping bank loan Board, license revocation, and resolu-
While the Reserve Bank has always losses under the rug tion actions such as mergers or sales
derived several important powers — all of which it can and does deploy
from the Reserve Bank Act, 1935 and by compromising effectively in case of private banks.
the Banking Regulation Act, 1949, what supervisory and Having adequate reserves to bear
matters is the effective independence any losses that arise from central
with which these powers can be ex- regulatory standards bank operations and having appropri-
ercised in practice. Over time, great can create a façade of ate rules to allocate profits (including
strides have been undertaken by suc- rules that govern the accumulation of
cessive governments at the behest of financial stability in capital and reserves) is considered an
the central bank, several economists, important part of central bank’s in-
and umpteen committee reports, to the short run, but may dependence from the government. A
restore the operational independence impact the economy final issue is one of regulatory scope,
of the Reserve Bank. The Reserve Bank, the most recent case in point being the
like many central banks of the time, got adversely in future recommendation to bypass the central
quickly trapped into the socialist plan- bank’s powers over payment and settle-
ning policies of post-independence ment systems by appointing a separate
government. Post the deregulation pendence to achieve it. The MPC, two payments regulator. The RBI has pub-
of interest rates in the 1990s, mon- years old since, has attempted stead- lished its note of dissent against this
etary policy achieved a more modern fastly through its rate-setting decisions recommendation on October 19, 2018.
dimension. to build credibility of the inflation tar- The deputy governor of the RBI gave
To start with, there was a “multiple get, a process that is generally believed, a parting shot. “As many parts of the
indicators” approach to setting interest and empirically documented, to help world today await greater government
rates. Importantly, this approach enter- lower the long-term bond yields as well respect for central bank independence.
tained much regulatory discretion. This as stabilise the exchange rate. The Governments that do not respect
made independence of monetary pol- While the jury will remain out for some central bank independence will soon-
icy individual-specific; in other words, time on the economic impact of the er or later incur the wrath of financial
it allowed for government pressure to flexible inflation-targeting framework, markets, ignite economic fire, and come
creep in easily for keeping rates low it is incontrovertible that the MPC has to rue the day they undermined an im-
at times of fiscal expansion under one given monetary policy an independent portant regulatory institution,” he said.
guise or the other. institutional foundation.
Following several episodic bouts of For several decades post-independ- letters@tehelka.com

tehelka / 15 november 2018 45 www.tehelka.com

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