Friday, April 23, 2021

RBI autonomy

The Reserve Bank of India Governor Urjit Patel, who was handpicked by the BJP-government on September 5, 2016, resigned on December 10, 2018 causing a major embarrassment to the ruling dispensation. Those following the events in the last couple of months in the central bank were in know of what was happening with difference of opinion on many issues with the central government. This is despite the fact that Urjit Patel quit with immediate effect citing personal reasons and many following the developments were expecting things going this way. This was the period during which the Centre and the RBI were engaged in an unseemly tussle over a host of issues that had a bearing on the RBI’s autonomy, something that Urjit Patel had wanted to preserve. His predecessor Raghuram Rajan has also pointed out, when a public servant resigns, it is a sign of protest. Urjit Patel’s decision clearly caught everyone by surprise as it came following perceptions of a thaw in relations between the Centre and the RBI, after an agreement was hammered out at a board meeting last month on some of the contentious issues, including a controversial proposal to use the central bank’s reserves for fiscal purposes. None in the banking and financial sector expected him to resign after he had a reported meeting with Prime Minister Narendra Modi and Finance Minister Arun Jaitley last month. But it appears that the larger issue which divided the Centre and the RBI – which related to autonomy and the independent functioning of the Governor – was never fully resolved. Urjit Patel’s resignation is a serious embarrassment to the BJP-government, which has scrambled to make statements expressing surprise at his action and praising him for his work. In fact, some of those related to the sector and went out of the way to defend the Centre’s stand on respecting RBI’s autonomy were unable to convince the public at large. As attempts to show that it had nothing to do with Urjit Patel stepping down and to reinforce that he did indeed quit for personal reasons, these remarks were largely unconvincing. Not only this, his resignation also sent shockwaves in the financial markets, which have been closely watching the developments on the RBI front. Urjit Patel’s quitting the RBI is likely to raise many questions about the Centre’s ability to work with independent-minded economists, coming as it does following the departures of former RBI Governor Raghuram Rajan, who was at odds with the Centre on many issues, and the sudden resignations of Niti Aayog Vice-Chairman Arvind Panagariya and Chief Economic Adviser Arvind Subramanian. It is true that Urjit Patel’s reclusive and non-communicative style may not have endeared him to some bankers, but his eminence as an economist and his understanding of macro-economic issues is undisputed. The successive governments have sparred with the RBI previously also on the issue of autonomy, but the BJP-government went one step further by starting consultations under Section 7 of the RBI Act, which gives the Centre the power to direct the RBI to act in specific ways. The government’s actions were more brazen and in tune with its perception that independence of institutions like RBI does not need to be respected. The immediate priority now is for the Centre to fill the breach with a competent person without wasting time. Global investors and the markets are already on edge, and they will be keenly watching, along with the ratings agencies, how the Centre handles this self-created crisis. The new Governor Shaktikanta Das, a career bureaucrat with Post-Graduation in History does not have any experience as an economist or the financial sector. He is bound to be judged, among other things, by perceptions about his independence. The central bank cannot be treated just like any other government department. Though Shakikanta Das has said that he would try his best to maintain the autonomy of the bank in its operations, but scepticism has been expressed by many observers in this sector. And the Centre will now be expected to demonstrate that a post-Patel central bank will continue to enjoy operational autonomy. At this stage, when the financial markets are on the edge due to slowdown in the economy not only in India but around the world for various reasons, nothing short of RBI’s autonomy will not go down well with both investors and the markets.