T N Ninan: Unintended consequences?

There has been a degree of real autonomy in the functioning of RBI which the new ordinance takes away

The Reserve Bank of India (RBI) seems to have decided, somewhat belatedly, to fight for its own autonomy. Well, it’s better late than never, and there is much to recommend in the suggestion by RBI to the finance ministry that it allow an ordinance issued last month to lapse at the end of the forthcoming monsoon session of Parliament. The ordinance gave statutory powers to a new committee of financial sector regulators and ministry officials, chaired by the finance minister. The government issued the ordinance over a week-end, and (it would now seem) without prior consultation. In doing so, it set up a system that erodes the autonomy of RBI, which, other than being the regulator of the banking system, is also the country’s monetary authority. Chipping away at RBI autonomy may not have been the intention, but if a law on this is enacted to take the place of the ordinance, that will become the fact.

The provocation for the ordinance was the turf war that erupted between the Securities and Exchange Board of India (Sebi) and the Insurance Regulatory and Development Authority (Irda) over unit-linked insurance plans (or Ulips). But in trying to find a solution to one problem, the government has taken a bite into RBI autonomy, and downgraded the governor to the same level as the heads of the other regulators. Oddly, this has been done when there was no dispute of any kind involving RBI on futures trading in currencies and the like, which are now within the purview of the committee.

The government would argue that the new committee’s role is limited to currency futures, interest rate derivatives and the like, areas in which other regulators have a role to play. While this is of course true, any member of the committee can bring any issue before it, and the scope of the law could be increased through the slow creep that often marks the government’s acquisition of additional powers.

The technical downgrading of RBI shows up in the ordinance in different ways. The inter-regulator coordination was so far done through a high-level coordination committee (HLCC); whereas the governor chaired that committee, he is now an ordinary member of the new committee, on the same footing as the other regulators. In the case of the other regulators, there are government nominees on their boards; in the case of RBI, the government nominee is a non-voting member. Though there is usually no voting on any issue, the difference underlines the difference in autonomy levels. The RBI Act does give the government the power to issue directives to RBI, but even this has to be done “in consultation with the governor”.

In the recent past, there has been tension between the ministry and RBI over interest rate policy, when Mr Chidambaram was the finance minister and Dr Reddy the governor, but that is now history. In an earlier age, the then governor (Manmohan Singh, as it happens) had submitted his resignation in protest at government pressure to give a controversy-ridden foreign bank the licence to open a branch in India; Dr Singh withdrew his resignation only when the government threatened to take away bank licensing from RBI’s purview. In practice, almost all RBI governors have given substantial weight to the views of the government/finance ministry on most policy issues, and RBI decisions are usually arrived at only after substantive discussions with the ministry. But in law as well as in the manner in which RBI governors have been allowed to function, there has been a degree of real autonomy which the new ordinance takes away, by placing key issues in the hands of a committee chaired by the finance minister.