RBI's 90th year celebration
Credit: PTI Photo
The Reserve Bank of India (RBI) Act was instituted in 1934 and the central bank started operations on April 1, 1935. Thus, the RBI entered the 90th year of its establishment, and the central bank is commemorating the momentous milestone in its journey. In his address, RBI Governor Shaktikanta Das said and rightly so that the evolution of RBI "has been closely intertwined with the development of the Indian economy”. Instead of reflecting on the RBI’s interesting history (which many have done), this article focuses on how the RBI should prepare and strengthen itself heading towards its 100th anniversary.
First, the central bank should work towards strengthening its autonomy. While it is true that discussions on the RBI’s autonomy have not been a topic of late, one cannot say it will continue to be so. The autonomy of the central bank is not protected in the law, and is largely based on how well the RBI management (especially the governor) manages the relationship with the government or the finance ministry. Just a few years ago, the RBI’s autonomy was under relentless pressure. The government pushed several policies that affected the Indian monetary and banking system but either the RBI was not consulted, or its advice was ignored: demonetisation, transfer of RBI reserves to the government, and electoral bonds. The tricky period led to the resignation of the governor and the deputy governor. Only once before this has an RBI governor resigned.
Second, the central bank should introspect on its governance. As per the RBI Act 1934, the governance of the central bank lies with the central board. As per law, the board should have 21 members and currently, it has just 15 members. One does not remember the last time the RBI had a full central board. The fault does not lie with the RBI as the Union government appoints all the directors. But then the RBI senior management should be consulting with the government to fill the positions. Will the RBI allow any of its regulated entities to function without a complete board for years on end?
Third, there is a need for clarity in the appointments to the RBI board. Autonomy and governance can only be strengthened if there is clarity in the appointment conditions of the RBI board members. The Act specifies that the tenure for the governors and deputy governors is for a maximum period of five years at the time of appointment, and then can be reappointed. The Act does not specify the reappointment tenure. There has been no consistency in appointments. Y V Reddy was appointed for a straight five-year term and was not reappointed. D Subbarao was given a three-year term followed by two years. Raghuram Rajan was given a three-year term and no reappointment. Urjit Patel was given a three-year term but he resigned after two years. Shaktikanta Das was appointed for a three-year term followed by another three-year term. For deputy governors, this is even worse, as they are first appointed for a three-year term and if reappointed, it is done close to the expiry of the tenure and at most for a year.
The appointment terms are different for the non-executive directors. The directors under local boards and expert categories are appointed for four years. They are eligible for reappointment but for a maximum period of eight years either continuously or intermittently. The appointment conditions for government nominees are that they can hold office ‘during the pleasure of the Central Government’. What does that mean!
The fourth point is related to the functioning of the RBI. It now has a Monetary Policy Committee (MPC) whose job is to achieve an inflation target of 4 per cent with a band of +/- 2 per cent. Though, it is still early days to call the MPC a success, we can say that it has done a reasonable job thus far. While monetary stability is highly important, there is a need to focus on financial stability as well. Financial stability has moved beyond just regulating banks to regulating non-banks and several digital players. There is a need to develop a body within the RBI which communicates with the media and market players on financial stability as well. Currently, the RBI’s top management answers some of the questions in the media interaction after the MPC meeting — this is not comprehensive. The MPC should either be reconstituted as a monetary and financial policy committee, or a new financial policy committee should be established on the lines of the MPC.
To sum up, the RBI turning 90 is a landmark moment in the central bank’s history. It has been both a keen observer and player in India’s development journey. However, the RBI should not rest on its laurels. Globally, central banks face high risk from both, the dominance of the governments and interconnectedness of the financial sector. The RBI should engage with the government to strengthen its autonomy and governance to be better prepared to face tougher challenges in the future.
(Amol Agrawal is an economist teaching at Ahmedabad University.)
Disclaimer: The views expressed above are the author's own. They do not necessarily reflect the views of DH.