Under whose orders?

During a debate in the Rajya Sabha last month, Union Power Minister Piyush Goyal said it was the Central Board of the Reserve Bank of India, which made the decision to invalidate the Rs 500 and Rs 1000 currency notes, and that the government merely endorsed it. “The Board of Reserve Bank took this decision, sent it to the government and with the government endorsing it, Cabinet gave its nod to it to demonetise the old currency notes of Rs 500 and Rs 1000 and bring new notes,” Goyal had said. However, in its submission to a Parliamentary panel on December 22, the RBI has made it clear that it was the Government which “advised” it to do so. Of course, no one here is accusing a Union minister of stating an outright lie, but it does seem that he was economical with the truth. “Government, on 7th November 2016, advised the Reserve Bank that to mitigate the triple problems of counterfeiting, terrorist financing and black money, the Central Board of the Reserve Bank may consider withdrawal of the legal tender status of the notes in high denominations of Rs 500 and Rs 1,000,” said the RBI in a seven-page note submitted to a parliamentary committee. Based on the “advice” of the government, which stated the reasons necessitating such a drastic move, the RBI Central Board met the very next day to “consider the Government’s advice”. It took the Central bank less than a day for “deliberations” before it decided to “recommend” the measures. It was on the night of November 8 when Prime Minister Narendra Modi made the announcement. Of course, the RBI has in recent days denied RTI applications seeking the minutes of the meeting, where they deliberated on the government’s advice. What we do know is that it took the Central bank of India less than a day to assess the impact of such a disruptive move, and give its assent. What’s worse, this disruptive move was introduced with minimal preparation. In its note to the Parliamentary committee, the RBI claimed that the decision to demonetise was only made the new Rs 2000 notes printed reached a “critical minimum”. However, as of November 8, the stock of Rs 2000 notes was barely 6 per cent of the total value of currency taken out of circulation. These findings may have possibly confirmed some rather uncomfortable suspicions about the nature of this disruptive policy. The Parliamentary panel will meet again on January 18, when RBI Governor Urjit Patel, top officials at the Ministry of Finance, and heads of major public sector banks will be called to depose for a briefing on demonetisation and its impact.

It seems evident that the decision to demonetise came from the government and not the RBI. The entire charade of demonetisation has probably revealed that the institutional autonomy of the Central bank has more or less withered away in the face of an aggressive government. Speaking to a business channel on Monday, former Reserve Bank Governor YV Reddy, said, “The role of Central bank in our economy is under threat, and it is a national problem which has to be addressed as a national problem”. In the interview, he goes on to assert that the Central bank’s reputation and credibility are at great risk post-november 8. On the issue of institutional autonomy, the Centre last year, announced that a six-member Monetary Policy Committee (MPC) would be entrusted with determining monetary policy, instead of the RBI Governor. Unlike the previous arrangement, the RBI Governor will not have veto powers, but he will have a casting vote in the event of a tie. This editorial had previously argued that theoretically, a model where the RBI Governor is the sole arbitrator of a nation’s monetary policy does not leave the institution in good health. Under the revised MPC, the committee’s recommendations will be binding, leaving the institution in a better shape, and not at the discretion of one individual. With three members nominated by the Centre and RBI Governor Urjit Patel’s ties with major corporate and the political establishment cutting across party lines, however, there were questions whether the MPC would be beholden to vested interests.

One of former RBI Governor, Raghuram Rajan’s excellent qualities as the Governor was his ability to withstand pressure from corporate interests and political animals within the ruling establishment to frame India’s monetary policy. Instead of framing policy, some observers argue that the RBI has been merely reduced to a body following the government’s orders. It’s apparent that the RBI has been left to play catch up with the government’s November 8 decree. Daily changes to cash withdrawal rules and exemptions represent its struggle to defend demonetisation and plug the gaps in policy, and for weeks, one only saw top bureaucrats in the government defending the policy move. As the custodian’s of the people’s money, the Central bank needs to step up to the plate.