The Reserve Bank of India’s (RBI) institutional identity, authority and autonomy have come under sharp focus once again. At least three former central bank governors have expressed fear that the RBI was being bulldozed, and its roles and responsibilities diluted. This isn’t an isolated instance. In the recent past, there were concerns that the government was attempting to clip RBI’s wings by creating a separate public debt management offi ce, while another proposal to move the regulation and supervision of the repo market to Sebi was, however, aborted. Latest reports that the government ‘advised’ the RBI to withdraw high value currency notes, just one day prior to the formal announcement, stoked further fears that the central bank was in for a severe reputational risk.
Some economists, including Nobel laureates, believe the NDA government is destroying an institution that has withstood all pressures in the past. Others strongly feel the government being the owner of RBI, simply exercised powers —which were until now unused under Section 7 of the RBI Act, 1934—giving directions to the central bank governor in matters of public interest. But ultimately, it’s the RBI governor, with command over signifi cant policy levers, who can disagree even with the highest authorities, if necessary. Perhaps, it’s in this context that former governor Raghuram Rajan emphasised RBI’s ability to say ‘No’ needs protection. He insisted clarity on RBI’s responsibilities as far as legitimate decisions were concerned, besides underscoring strengthening of oversight.
Policy making is about deciding in the face of uncertainty, and taking measured risks, after stakeholder discussions. The reason why RBI has to do what it has to do isn’t easy to comprehend for everyone. So, it must explain to the best of its ability to create a structure where the public trusts the central bank to do the right thing. Else, it may end up as a de facto powerful body with low de jure status.