In a hurriedly called press conference this morning, the finance minister made a gallant attempt at fire-fighting, yet again. He said that the government will take a view on the draft Indian Financial Code which proposes to dilute powers of the RBI chief, post comments from other stakeholders.
The revised draft of the Indian Financial Code is based on the recommendations of the Financial Sector Legislative Reforms Commission headed by Justice BN Srikrishna talks about taking away of the veto power of the Reserve Bank governor in the proposed seven-member Monetary Policy Committee that will have a dominant say in setting interest rates. Also that four members of seven would be from the government and three from the RBI.
Now there are several issues with this recommendation that threatens to destabilise economic decision-making in the country –shutting out one of India’s most credible institutions from a role that it has performed with utmost perfection, that of drafting India’s monetary policy.
Reserve Bank of India in its 80-year history has emerged as one of the most credible institutions that has protected the Indian economy while traversing through several crises –its litany of governors including former Prime Minister Manmohan Singh have furiously guarded its independence and integrity.
Through the years, the RBI has remained the voice of reason and caution and has not been wary of taking a contrary view from the government. It has, almost always, called a spade, well, a spade. From realistic growth projections to the being cautious voice on Make in India — RBI has constantly reiterated its independence in economic thought.
Stories of friction between RBI and finance ministry have almost become routine as one hanks for lower interest rates and the other (RBI) remains hawk-like focussed on Inflation. So when the finance minister announced setting up of a Public Debt Management Authority in the Budget, taking away RBI’s control over the task of managing the Centre’s borrowings, it was RBI’s biggest turf battle to date which the RBI won. Months later, a recommendation threatens to clip the wings of the RBI governor once again.
It is well known that the ministry would have been well aware of the recommendations before making them public as they are being seen as a brazen attempt the stymie the bank and placing all crucial economic decision-making power in the realm of the finance ministry. Industry has been lobbying for lower interest rates and clearly the bank has resisted and has remained steadfast focused on inflation.
So while it is evident that every attempt is being made to rein in the RBI, perhaps it would do the government good to remember that India’s institutional credibility is not particularly much to write about — almost every institution, including the Central Bureau of Investigation has been called into question — the RBI and RBI governor are really islands of normalcy in the very chaotic institutional landscape of India and disturbing that would not only hurt the government’s credibility, but will leave an overhang on India’s economic decision-making.