Rbi: Platonic Bastion Or Potemkin Village?

In order to cope with all these new tasks, the RBI will have to undergo a transformation, from being an institution which exercises authority over the banking system with rules-bound procedures and Bible-like respect for the manual, to one which can provide strong intellectual leadership in responding to events in the domestic and foreign markets. The effective execution of the delegated authority and the accountability, which is what the independence of the central bank connotes, is impaired, if there are no arrangements in existence which facilitate public understanding and monitoring of monetary policy and also reveal the central banks expertise, organisational efficiency, and the information channel system necessary for formulation and implementation of monetary policy along a desired path.

 

Does the RBI as it is at present deserve autonomy both in terms of its organisation and profess- ionalism?

The RBI, like other public sector banks, offers a wide scope for the application of the Parkinson law and the Peter principle. Over the years, though some of the major departments such as the Industrial Finance Department and the Agricultural Credit Department were hived off from the RBI, its staff has continued to grow in geometric progression. With almost 34,000 employees, the RBI has entered the Guinness Book as the largest employer amongst the worlds central banks. This provoked the snooty London Economist to point out that an inverse correlation between economic performance of a country and the number of employees of the central bank may, possibly, be one of the reasons for Indias low growth rate over the years!

Instead of making any attempt to downsize its staff, the management of the RBI being blessed with a permissive soft-budget constraint extended the retirement age of employees to 60 years about six years ago, supposedly on case by case basis. As it turned out, every case has become like every other. As a result all employees now routinely retire at 60. Strangely enough, when the scam exposed the inadequacy of the RBIs Supervision Department, there was no shake-up of personnel in the higher echelons, which would have occurred in any institution which is serious enough about its accountability. There is no promotion policy which can throw up persons of ability and merit. The senior management is hard put to find a talent, which is like a search for a needle in a hay-stack. In terms of management organisation, staff and modern management skills, it is at the same level of inefficiency as the public sector banks to which it is supposed to provide guidance and advice. The RBI, then, is an institution

without gravitas. This is not an outsiders view of the inside of the RBI; it is the insiders view from outside as well. Anand Chandavarkar, a former alumni of the RBI and a scholar of central banking, says in his latest book Central Banking in Developing Countries (Macmillan, London) that the RBI experience serves as an instructive lesson on how easily a highly professional central bank can slide down the Gaderene slope to virtual ineffectiveness. Its post-independence record is one of an abdication of monetary control and some egregious regulatory failures as in respect of the great securities scam of 1992-93. There is the stern lesson of how even a professional central bank, which, ironically, enjoyed genuine independence in the colonial days, can be swiftly transformed after independence into a dysfunctional monetary and regulatory authority with governors subject to kaleidoscopic tenures.

The RBI has done nothing, in the last five years of economic reform, to change its image The business is as usual. The RBI has observed, with vengeance, a Bonapartite rule of inflating the ranks of generals in order to deflate their importance. Witness, as a proof, the swelling of the ranks of executive directors and deputy governors. There were two committees appointed about four years ago on RBI organisation. The one on management audit done by an outside agency contained sweeping reforms. The other Marathe report is on human resource development. Both of these are gathering dust in the RBI archives. Independence in such a milieu is a chimera. The finance minister will do well to remember Anand Chandavarkars sagacious message that central banking, far from yielding a corpus of settled unambiguous conclusions points to a decisive shift in the paradigm from independent to effective central banking, based on the highest professionalism and integrity, lest central banks fail in their appointed role of

Platonic bastions of the economy and become the Potemkin villages of the financial system.