Mint Road Vs North Block
A move to appoint a government official as a deputy governor in the RBI seems to be aimed at improving co-ordination between the regulator and the finance ministry
It is an open secret in government circles that the relations between the Union finance ministry and the Reserve Bank of India (RBI) are not too cordial. On many occasions in the past, finance ministry mandarins have indicated their disappointment and even frustration over the way the RBI has dealt with monetary policy matters, bank supervision and the bond market. A growing perception is that Mint Road in Mumbai, where the RBI is headquartered, has in the last the couple of years distanced itself from the Union government to an extent that no meaningful dialogue is possible.
To be fair, the RBI too feels the same way about North Block in New Delhi, headquarters of the Union finance ministry. The country’s apex bank appears wary of attempts by the government to influence what it should do with regard to interest rates or supervision of banks. The RBI has also made it known to North Block its concerns over the government’s borrowing plan and attempts to persuade it to soften its regulation on recognition of banks’ sticky assets. An impression has gained ground that the scope for consultation and meaningful dialogue between senior government officials and the RBI’s top team has considerably narrowed in the last few months.
Some people would argue that this is a healthy situation. The government and the RBI not agreeing with each other on some policy issues is an indication that the regulator has maintained its independence. As long as there is no deadlock or a policy logjam, a healthy tension between the government and the apex financial sector regulator should be welcome.
But what is at the heart of the ongoing tension between North Block and Mint Road is something different. It is not just a question of the regulator asserting its independence or the Union government gently pushing its own way of thinking on policy issues to be accepted by the RBI. The larger concern that should worry everybody, including the RBI and the Union government, is the absence of an informal communication channel between the two.
Is there someone in the government that the RBI can reach out to and convey what it actually meant through a statement or a policy action was misunderstood? And is there someone in the RBI that the government can talk to and share its thinking process on its intended course of action? The lack of an informal communication channel is what should bother the government and the RBI, if they want to eliminate the undesirable outcomes of the current tension between the two.
In the past several decades, the informal communication channel was maintained through the periodic appointment of senior government officials as members of the top RBI team. In post-reforms India, starting from 1991, the RBI has always had either a governor or a deputy governor, who was fully conversant with the way the government functioned. This was mostly true even in the 1980s, but the trend got firmly established in the 1990s and the Noughties. At any point in time till at least August 2016, there was either a governor or a deputy governor of the RBI, who had intimate knowledge of how the government and the finance ministry functioned. Indeed, most of them had experience of having worked in North Block.
This was an advantage that strengthened the flow of two-way communication between the RBI and the government. There have been periods when both the RBI governor and one of the deputy governors came from the government system. From 2013 to 2016, when Raghuram G Rajan was the governor, the informal channel was maintained largely through the governor, who had worked in the finance minister before his Mint Road stint. But after August 2016, that link has completely snapped.
Today, the RBI top leadership has nobody who has an intimate knowledge of how the government system functions or has had a working relationship with senior officials in the finance ministry. This is not to justify the appointment of government officers as governor or in senior positions in the RBI. But there is also no denying the importance of having someone in the RBI top leadership, who knows how the government functions and responds to policy challenges.
In the current RBI team, the governor and his three deputy governors have had no experience of working in the government. The government and the RBI have been in discussion to fill the vacancy for the fourth deputy governor. It would thus be no surprise if the appointments committee finally chooses a serving bureaucrat, who has had some experience of having worked in the Prime Minister’s Office or the finance ministry. Indeed, a civil servant with the experience of having worked in the PMO is a more likely choice, given the way South Block has become as important as North Block in economic policy making under the current dispensation.