It appears, at least on the evidence of the meeting, that the central bank will henceforth need to be more empathetic to the concerns and suggestions of the board. The external directors - currently numbering 13, including two government nominees – seemed poised to exercise overt influence over the regulatory decisions of the governor and his deputies (there are four at present).
Does this mean the central bank will now be board-run? Given that outside board members are chosen by government and are generally thought to be more sensitive to the eco-political concerns of New Delhi, will this impinge on the RBI’s autonomy?
Conversations that TOI has had with former RBI governors, bureaucrats, policymakers and politicians suggest that the central bank has indeed lost ground to the government.Asked if he thought there has been a “fundamental shift” in the decision-making process, a former RBI governor said, “Yes.”
“Earlier it was essentially between the governor and the government. What has happened is that the board has come into the picture, it is active now. And it has started taking instructions from the Centre. In that sense, there is an interjection. Past boards included people like A P J Abdul Kalam and U R Rao who represented society in large and they only guided. The governance structure remains the same but the relationship has now changed,” he said.
When asked if the setting up of a committee to examine the RBI’s capital framework implies that the central bank is now board-driven, another former governor said: “It appears that its autonomy has been diluted as it is the RBI that used to set up the committees.” But in response to whether the overall autonomy of RBI has taken a knock, he said: “I hope not.”
A senior government functionary did not mince words when he told TOI that the RBI management’s exclusive remit will now be limited to monetary policy. On other policy matters, “government has acquired primacy and this is how things were always supposed to be in a democracy,” he said.
“Right from the days of Nehru, there has been clarity that the agenda-setting prerogative, so far as policy matters are concerned, rests with government. This flows from the very spirit of parliamentary democracy and popular accountability”, he said, adding that “natural order has been restored”.
There were tensions in the past as it is natural for some to acquire grandiose notions of autonomy. But faced with resistance in the recent past, others chose to walk away. We as a majority government are conscious of our mandate, and therefore decided to stay put and made it clear to them that you have to walk with us,” a senior government functionary told TOI.
There is a view that the Urjit Patel-led RBI, due to its “stubbornness” and reluctance to communicate and engage with the government and take on board its concerns on the economy, has instead of protecting central bank autonomy contributed to its erosion. The final straw, according to just about everyone, was deputy governor Viral Acharya’s provocative public speech on the dangers of undermining central bank independence.
Broadly speaking, the RBI wears two hats – it sets monetary policy, and it regulates the banking sector. As far as the general public is concerned, the central bank’s most important function is to fix key interest rates, which impact EMIs on home and consumer loans. Since the constitution of the monetary policy committee with three representatives each from RBI and government (the governor has the casting vote in the event of a tie), the central bank has lost the absolute power it had till 2016 to decide on rates.
That the government has now also established itself as the more equal of the two on the regulatory side is evident from the manner in which the RBI yielded on a number of issues at Monday’s meeting. It was under the “board’s advice”, said RBI’s post-meeting statement, that the central bank agreed to offer a restructuring scheme for small businesses. Another concession that the government extracted was the easing of capital norms to help release more funds for lending.
It was the government’s frustration over the RBI’s refusal to engage with it on these and other key issues that forced it to consider invoking Section 7 of the RBI Act for the first time in the 83-year-old history of the central bank, top North Block officials had told TOI when it broke the story on October 31.
While the ‘nuclear option’ has so far not been exercised, it hangs like Delhi’s smog over the RBI – although indications are that the government believes the need for it has passed, at least for the time being. But it does intend to formally consolidate on the implicit gains of November 19 by seeking a bigger board role in the central bank’s governance structure at RBI’s next board meeting on December 14.
from Times of India https://ift.tt/2OV6zBl
