Questions of the board

The Ministry of Finance (MOF) has categorically refuted allegations of interference in the Central bank’s functioning made by a union of Reserve Bank of India employees. “Consultations between the government and RBI are undertaken on various matters of public importance whenever such consultation is mandated by law or has evolved as a practice. Consultations mandated by law or as evolved by practice should not be taken as an infringement of autonomy of RBI,” the Ministry said in a statement. In a letter to RBI Governor Urjit Patel, the United Forum of Reserve Bank Officers and Employees argued that employees were feeling “humiliated” by events since demonetisation and alleged that the government has been impinging on the Central bank’s autonomy by appointing an official for currency coordination. Why does the government need to appoint an official to oversee work directly under the jurisdiction of the Central bank? 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 invalidate the old Rs 500 and Rs 1000 currency notes. 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. 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. Under circumstances where the RBI is seen to have been reduced to a body following the government’s orders, one can hazard a guess as to what the MOF means by “consultations”. Issues about the RBI’S dwindling autonomy have been raised by at least three former Governors. Instead of rubber-stamping the Executive’s decision, the RBI board could have turned the government down and asked its management to prepare a report on the costs and benefits involved and take a deliberate decision at its next meeting. Why did the RBI board act merely as a rubber stamp? The answer goes beyond demonetisation and the current government. It’s down to a regulation made in 1949 and the institutional habits it engendered.

In a recent column for an Indian daily publication, Ila Patnaik, a Professor at the National Institute of Public Finance and Policy, writes: “A normal governance practice is to create committees of a board with specific mandates and come back to the board for decisions, rather than take decisions. All decisions are taken by the board. In the case of the RBI, all the general powers of the Central Board have been delegated to the Committee of the Central Board — the Committee of the Central Board virtually can do everything that the Central Board can, under the RBI Act. This defeats the spirit of collective decision-making at the Central Board-level and circumvents the necessity of obtaining votes of the majority of members of the Central Board. The minutes of the Committee are placed before the Central Board; this serves little purpose as decisions are already taken, and members did not participate in them. The Central Board effectively becomes responsible for all decisions of the Committee without deliberations — while the Committee has no accountability on how it discharges its duties.”

In other words, the board deliberates on next to nothing, when it comes to the most important decisions of public interest or how the Central bank functions, giving its management carte blanche to do whatever it wants without any scope for public accountability. In any other private entities, shareholders would have been enraged by a board that functions in such a way. While observers may seek to lambast Urjit Patel for not standing up to the government or doing a shoddy job of disbursing cash, unless the RBI central board continues to work in this manner, the problem will persist. Going a little further on the issue of transparency, the RBI has in recent days denied RTI applications seeking the minutes of the meeting, where they deliberated on the government’s “advice”. In fact, experts contend that this is not merely a case of the board’s decision to recommend demonetisation, but a general practice. Would the Central bank have acted in such haste to follow through on the government’s “advice”, if the minutes of its meeting or the agenda been open to public scrutiny? With greater transparency, comes accountability. When the management and board know that the discussions held within their confines are made public, it forces them to behave more responsibly. In turn, this reduces the scope for a Central bank falling prey to government-led pressure or taking ill-conceived decisions. Of course, the government and RBI will cite “national security” not to subject the minutes of their meetings to public scrutiny. But it should be up to Parliament to decide what matters are beyond the scope of public scrutiny. If the government is serious about following through its respect for the RBI’S autonomy, it must introduce legislation in Parliament, which thoroughly examines in detail the functioning of its Central Board and introduce key amendments.