Preparing For A New Role
The Reserve Bank of India's slack season policy earlier this year was a path-breaking one; it aligned key interest rates to the bank rate and paved the way for strategic steering of interest rates. This was followed by the report of the Tarapore Committee, which recommended the dismantling of exchange control which the RBI has operated with considerable energy for almost 60 years. Full convertibility may take years to come; but what is now noticeable is that the RBI has begun to think "� perhaps dream is the better word "� of the world after convertibility.
The dream is in part an old one. Every year the governor goes to meetings where he meets other central bank governors, and sees what power and mystique some of them "� notably the president of the Bundesbank and the chairman of the Federal Reserve "� exercise. He has no doubt read about the face-off between president Hans Tietmayer of the Bundesbank and Finance Minister Theo Waigel of Germany this year. Waigel is in trouble because Germany is unlikely to be able to fulfil the criteria this year for entry into the European Monetary Union. He thought of a clever expedient -- revalue the gold lying with the Bundesbank, and take the profit into his budget. Tietmayer not only opposed the trick, but made Waigel back down. This is the stuff dreams are made of; the RBI's dreams also turn to autonomy.
The annual report of the RBI makes a useful, if elementary, discussion of the issues involved. Autonomy is given in pursuit of a common objective, usually price stability. From 1995 onwards the RBI pursued this objective with Manmohan Singh's support. It brought down inflation, but at the same time caused the worst industrial slump in a decade. Autocrats cannot afford to go wrong. The Federal Reserve has a formidable economic wing which watches and analyses hundreds of time series to arrive at the best interest policy. It is this competence that the RBI needs to develop; autonomy will follow.
Competence is easier if the central bank is focussed on a small number of policy instruments; but the RBI revels in wielding thousands of instruments. No autonomous central bank requires banks to submit hundreds of returns, capriciously offers to give a banking licence and then withdraws it, tells people that they can use credit cards to pay for software unloaded from the internet, and not otherwise. The RBI is so sunk in nitty-gritty that its energies are dissipated in meaningless and unnecessary action; and all this activity, all the restrictions that the RBI administers, prevent the emergence of an integrated, smoothly functioning network of financial markets.
So if the RBI is keen on assuming a new, more independent role, it must be able to focus on the essentials and dump the rest. It should go through its massive rule book and scrap as much of it as possible. It should go through the thousands of letters it has written to resident individuals and companies detailing millions of restrictive conditions, and cancel those restrictions. It should give people the chance of managing their own lives.