ANALYSIS. How independent is the Reserve Bank Governor?

“The Reserve Bank of India Governor is very independent. And, I took the permission of my Finance Minister to say this…,” YV Reddy, former RBI Governor, said at a seminar recently, recalling his response to a query about autonomy of the central bank in India at an international conference back in 2008.

This answer by Reddy assumes significance, more so with the ongoing debate about the role of the RBI Governor in taking key decisions, such as change in policy rates and the government’s proposal to put in place a monetary policy committee.

YV Reddy spoke at length on the monetary policy committee and autonomy of the apex bank at a seminar held at the University of Hyderabad recently.

Based on the recommendations of the Financial Sector Legislative Reforms Commission and the Urjit Patel Committee, the government proposes to set up a monetary policy committee to be chaired by the Governor. It will have as members the Deputy Governor (in-charge of monetary policy) and an Executive Director from the RBI as well as two others from outside. The Chief Economic Advisor will be the government nominee.

The issue for the bankers now is how this will impact the decision-making ability of the Governor and whether the members can override his view on a key policy issue. The other question is accountability. Will the Governor take responsibility for the decisions or will it be the collective responsibility of the monetary policy committee?

YV Reddy said: “In 2008, I felt the need for an advisory committee on monetary policy. I constituted a technical advisory committee for advice and continued to be accountable.”

Reddy’s successor, D Subbarao, almost continued the same system with periodic changes. Interestingly, there were many occasions when the members nominated by the Governors themselves had differed in their views in many consultations, as has been acknowledged.

The present Governor Raghuram Rajan appears to be unperturbed over losing his veto power if the proposed monetary policy committee takes shapes. On Tuesday, he said shifting the veto power to the committee has some ‘virtues’ and the RBI and government have reached a consensus on the issue.

But will this augur well for the economy or will we simply have a central bank/Governor controlled by the government? One needs to wait for the answer and see how this mechanism actually works.

According to the RBI Act, there is no security of tenure for the Governor. He can be removed without any reason, if the government wishes to. “The job of a peon or a clerk is more secure in the RBI than its Governor. Everything depends on the trust the government reposes in him,” said YV Reddy.

The government has the right to give directions to the RBI and tell it what it should do. There is such a clause in the RBI Act. But that direction has never been given in the history of the RBI. “So, you have to distinguish what is  de jure  (by law) and what is  de facto  (in reality) and I think  de facto , the RBI is independent,” Raghuram Rajan said on Tuesday.

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