Prelims Level
Mains Level
Prelims Syllabus : Mains Syllabus : GS 2: “Issues relating to development and management of Social Sector/Services relating to Health, Education, Human Resources.”

What’s in the Editorial?

  • Among the quintessential traits of a central banker is to be unpredictable in action so that the markets can be kept guessing. Urjit Patel exhibited this quality in ample measure when he announced his decision to walk out of his job as Governor of the Reserve Bank of India on Monday.
  • His resignation caught everyone by surprise, including the markets which had been lulled into believing that the spat between the central bank and the Centre had been amicably resolved.
  • The rumours of him resigning, which were doing the rounds before the last meeting of the RBI central board three weeks ago, had died down. He had chaired the Monetary Policy Committee meeting just last week and also a meeting of the Board for Financial Supervision that discussed the issue of Prompt and Corrective Action on some banks.

Governance issue:

  • The one important issue that remained on the table after the November board meeting was of the central bank’s governance and autonomy. Interestingly, in the days following the meeting, there were reports of how the Centre was planning to push for board committees that would supervise specific areas of the central bank’s operations.
  • Such a move would have compromised the Governor’s position and curtailed his operational freedom. Was this the proverbial last straw for Dr. Patel?
  • This is a battle between the government and the central bank, not between individuals representing the two sides. But sadly, Dr. Patel seems to have taken the Centre’s push as a personal affront.
  • It is not as if RBI Governors have never had serious run-ins with the government before. But they were always handled quietly behind the scenes and the only way that the public ever got to know of these episodes was when RBI Governors wrote memoirs. This time was different though.

Ill-advised escalation:

  • The main point of friction between the two — on monetary policy — was also addressed through the introduction of the Monetary Policy Committee two years ago by amending the RBI Act. In effect, an important thread in the relationship was institutionalised and the personal element was taken out, precisely to avoid situations such as the current one.

Grievances of the Government:

  • It is true that the Centre has been more assertive in its relationship with the RBI in recent times, but it has some genuine grievances such as on the issue of providing liquidity for non-banking finance companies and a less stringent capital norms regime for banks.
  • As the political executive, the Centre obviously feels that it is responsible for ensuring that there is no freeze in the credit markets. There is nothing wrong with that. The central bank, however, is more conservative. The last thing that it wants is to create another bad loan environment just as it is beginning to get out of an earlier mess.

RBI overlook:

  • Added to this is the Centre’s grouse that the RBI was found wanting in its supervision role. The Punjab National Bank fiasco and the IL&FS collapse both happened right under the nose of the RBI, which is supposed to have conducted regular inspections of both entities. Neutral observers have also pointed to these lapses. His resignation has queered the pitch for the Centre, which is now scrambling for non-existent defences.
  • The outgoing Governor’s resignation has trained the spotlight so sharply on the festering issues between the RBI and the Centre that it is extremely difficult for his successor, Shaktikanta Das, to act on any of them in favour of the latter, even if it is merited. Seen from this angle, the Centre has probably shot itself in its foot.

The road ahead:

  • As former RBI Governor Raghuram Rajan points out in his book, we need a clearer enunciation of the central bank’s responsibilities.
  • The position of the RBI Governor in the government hierarchy is not defined clearly. “There is a danger in keeping the position ill-defined because the constant effort of the bureaucracy is to whittle down its power,” argues Dr. Rajan.
  • Not just this, the personal element in decision-making in the RBI has to be taken out and replaced by an institutional mechanism, much like the MPC did in the case of monetary policy.
  • The reference of the reserves sharing issue to a committee is one such idea where there will be little scope for the Governor to act on his own just as the government too cannot exert pressure on him.
  • Never waste a good crisis, said Rahm Emanuel, former White House Chief of Staff. After having created the crisis, the least that the Centre can now do is to use it to reform the system.
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