The Reserve Bank of India has its job cut out. The primary functions of the Central Bank as set out in its Preamble are:
• To regulate the issue of Bank notes and keeping of reserves with a view to securing monetary stability in India;
• To operate the currency and credit system of the country to its advantage;
• To have a modern monetary policy framework to meet the challenge of an increasingly complex economy,
• To maintain price stability while keeping in mind the objective of growth.”
Central Banks, the world over, have had issues in keeping politics away from economics. In the 1960s and 1970s, the world went through a spike in interest rates, which gave central bankers the right to set rates and administer monetary policies. But their veneer was torn apart by the Lehman crisis of 2008. Since then, Apex Banks have been guilty of reactive strategies. And politicians, of the US or India, are now having a difference of views with them.
The problem arises when the government feels that some policy decisions of RBI hamper economic growth. Like any corporate entity, there is a Board of Directors. The decisions are the prerogative of the full-time Governor who does so in ‘consultation’ with the Board members. Besides, four regional ‘local’ boards meet regularly. Thus, it is expected that those serving the RBI on a full-time basis be fully informed.
Thus far, the RBI has had its way and differences have been kept behind closed doors. Now, with the political appointee
S Gurumurthy who seems to think that what he thinks is right, and it has to be done, the spat is out in the open. The focal point seems to be the interest rate structure, which according to this director needs to be lowered. Further, he wants to push for relaxation of the restrictions placed on the technically bankrupt PSU banks that have been put by RBI under the label “Prompt Corrective Action (PCA).” The PCA framework has been in existence since 2002. This stifles them from doing further lending business. Gurumurthy’s view is that this slows growth and hurts the MSME sector, which is heavily dependent on the PSU Banks. This faction also wants the RBI to extend special help to the NBFCs that are seemingly starved of liquidity due to the IL&FS fraud.
The Reserve Bank has always had political appointees. While North Block has appointed governors, governments have rarely intervened in policymaking. The RBI has been pliant to politicians at most of the times, whether it is in the lazy supervision of PSU banks or allowing them to window dress, ignoring the leasing companies’ fixed deposit crises or in letting IL&FS continue with its negative capital.
Thus, RBI has not been doing what it was supposed to do. They permit too many entities to accept money from public and then watch it fester into a deep wound. Even now, there are NBFCs that sell ‘structured’ products to their high net-worth clients (HNI) clients, which violate the deposit-taking rules. RBI’s domain knowledge is limited. This led to SEBI stepping in some areas and drawing up regulations. RBI has not put in a simple CIBIL like system of references for every borrowing entity.
We see fault lines on both sides.
– R Balakrishnan
