Stronger law needed on autonomy of RBI

Responding to an avalanche of criticism from various political parties, and from former RBI governors, on the delicate subject of the government infringing the domain of the country’s central bank, the Union finance ministry said on Saturday: “It is categorically stated that the government fully respects the RBI’s independence and autonomy.”

The finance ministry’s statement also noted that “consultations between the government and the RBI are undertaken on various matters of public importance, either mandated by law or evolved as a practice”.

The defence is bland and seems to avoid addressing the context in which the criticisms have been made. The disapproval of the government by political parties for encroaching on the RBI’s turf follows a sharp complaint by some RBI unions to governor Urjit Patel that the appointment of an officer by the government to engage in currency coordination with the RBI reflected a case of operational “mismanagement” by the RBI. Saturday’s official statement is perhaps meant to handle this criticism, although it does not say why an officer was despatched to coordinate with the RBI, when in the area of financial stability, monetary management and as the issuer of currency as well as the supervision of commercial banks in the country, the RBI enjoys a unique and autonomous status — much in the same way that the Supreme Court or the CAG do in their respective domains.

In pursuit of its objective of demonetisation, which was sprung on the country without any preparation whatsoever, as has become amply clear through several revelations, the Narendra Modi government appears to have trampled on the autonomy of the RBI, with Mr Patel not demurring on the record, in effect caving in.

Parliament needs to worry whether such a governor can protect the institutional integrity of the country’s central bank. But Parliament needs to do more. It should take steps to bring the RBI’s autonomy and functional independence into the statute book in the same manner as that of the CAG.

In its reply to a parliamentary panel, the RBI has clearly stated that it was “advised” by the government to approve the demonetisation the PM had in mind, and it did so within 24 hours. This is severe self-indictment, and the rest follows.

It is this aspect of the matter, rather than the one noted by the RBI’s unions, that has been considered by several former RBI governors who, in their time, hadn’t hesitated to cross swords with the government. Such is the tradition that the RBI’s longest-serving governor, Benegal Rama Rau, tendered his resignation days before he was to retire to protest against the observation of then finance minister T.T. Krishanmachari that the RBI was a “department of the government”. That tradition has to be protected.