RBI vs govt: No Governor since 1935 seems to have understood 'independence'

It might be a good idea to remind the Governors of Montagu Norman's view that the relationship between the government and the central bank should be that of a 'Hindoo marriage'

In the past few days, we came across rumours of Reserve Bank of India (RBI) Urjit Patel set to resign if the government kept ordering the RBI about — the Centre is empowered to do so under Section 7 of the RBI Act. Indeed, thanks to an ill-informed media, this section has now come to be loathed, just as Article 352 of the Constitution which allows the imposition of an emergency.

Thankfully, better sense seems to have prevailed and it looks like Dr Patel would continue until the end of his term next September. Bluntly put, all RBI Governors since the first seem to have confused the independence of monetary policy with the independence of Governors — and assumed only they could prepare the monetary policy, without any government say in it.

It might be a good idea to remind the Governors, when they sign the register taking over the role, of Montagu Norman’s view. The powerful Governor of the Bank of England from 1920 to 1944 who could bring down governments, Norman believed that the relationship between the government and the Bank of England should be that of a “Hindoo marriage” — where the former was the dominant spouse and the latter the subservient wife who could advise but not insist upon the advice being followed.

No, Minister

But Norman’s advice has remained unheeded since 1935, when Sir Osborne Smith was appointed as the first RBI Governor. Having been used to having his way as the managing director of Imperial Bank of India — which would become State Bank of India in 1956 — Sir Osborne refused to do as bidden by Delhi.

Sir John Grigg, who as Member Finance of the Viceroy’s Council was the equivalent of the finance minister in today’s time, and Sir Osborne differed on the two things that meant the most to the British — the exchange rate and the tariff rate. Sir Osborne was implacably opposed to 1s.6d. as the exchange rate, as he was convinced that would be deflationary. He also wanted a lower bank rate.

The government would not budge on the former and was scornful of the latter. But since Section 7 did not exist back then, Sir Orborne could not have been ordered to do the government’s bidding.

The friction festered. As an Australian, Sir Osborne could be very outspoken, even when not required.

Once, after receiving some instructions from the Secretary of State in 1930 as chairman of the Imperial Bank, he had complained “anyone would assume that the Imperial (Bank) was a department and a very inconspicuous department of the government.”

Sir Osborne had once also told the government that “as long as I run the Imperial Bank, I will not be run by London or anywhere else”, and further, that “I would not tolerate interference with my business.”

In 1936, he had written in a letter that he was “sick to death” of the government’s attempt to “dominate the RBI.”

File photo: RBI Governor Urjit Patel with deputy governors and others in Mumbai | Photo: Dalip Kumar

“A Weak Ass”

There were two other issues over which Sirs John and Orborne fought. When Sir Osborne opposed the gold drain from India and wanted to impose an export tax on gold, the government opposed him tooth and nail.

Later, when Sir Osborne wanted to appoint ICS officer A D Shroff as a deputy Governor, Sir John dismissed the suggestion calling Shroff “a perfectly frightful man and intimate crony” of Sir Osborne. Sir Osborne’s negative marks were piling up.

The last straw came when he called the Viceroy, Lord Linlithgow “a weak ass”. So, in July 1937, just two years after taking over as the first Governor of the RBI, he was forced to resign.

The irony was that he had been appointed, instead of some ICS officer or British banker, precisely to give the impression that the RBI was independent.

The British civil servants’ view of Sir Osborne was coloured also by the fact that he was praised by Indian businessmen. The Indian Merchant Chamber wrote a very critical letter to Grigg after he resigned.

And just as is happening now, the Congress demanded full disclosure. The government simply remained silent.

As the late S S Tarapore, one of the great central bankers India has produced, had once demanded, “The RBI owes it to posterity to release a dedicated volume on the Osborne Smith episode — warts and all.” It may show that nothing has changed.