Over the course of decades, the Reserve Bank of India (RBI) has gained considerable credibility as an independent and efficient monetary authority. Many would say it is one of India’s few world-class institutions. Although technically subservient to the government through the RBI Act, successive governors have won effective operational autonomy. Most recently, it has even managed to come to an agreement with the government on a single target for monetary policy — consumer inflation — which allows it to build even more credibility and to produce transparent policy. It is unfortunate, however, that much of this progress in creating a credible and autonomous institution has been jeopardised in the wake of the demonetisation exercise.
The primary responsibility for the stability of the currency lies with the central bank. Yet, there is little doubt that the decision to withdraw Rs 500 and Rs 1,000 notes — over 85 per cent of the currency in circulation by value — was not taken at the instance of RBI. It was quite clearly a government decision in which the RBI’s board acquiesced and for its own credibility, it is important that RBI releases the reasons for its acquiescence, given its mandate to preserve currency stability. How was its mandate being served by its meek agreement with the currency withdrawal? If its mandate was not being served, why did it agree? These questions, integral to evaluation of the RBI’s autonomy and credibility down the line, must be answered through greater transparency.
Indeed, it is far from clear what the RBI’s institutional estimation of the rationale for, and progress of, the demonetisation exercise is. One of the most significant events in Indian monetary history has taken place with practically no public intervention by RBI other than through a series of contradictory and puzzling circulars about specific operational details. This situation cannot be allowed to continue. More information is needed. Sadly, however, it appears that even information as basic as the amount of currency being deposited weekly in banks is not always transparently and easily available. The first duty of a 21st century central bank is transparency, and on this count there can be no two opinions that RBI has failed.
Of course, RBI has in the past taken various decisions in order to placate the government of the day. Previous governors have spoken out after their tenure about the sort of pressure that was brought to bear on them. But no such decision went as far as this one, and never was the complicity between RBI and the government as high. Indeed, at no point in recent decades has RBI appeared as timid as it does at the moment. It must strive now to recover its reputation, and to once again demonstrate that it is an autonomous institution, and not subject to New Delhi’s whims. Making clear its considered institutional stance on demonetisation would be a good start. It should also conduct a transparent investigation into the stress that the exercise has placed on the banking sector, and build scenarios for what it means for bank lending in coming months. The road to regaining credibility will not be short, but RBI should start down it forthwith.
