Viral Acharya, deputy governor of the Reserve Bank of India (RBI), has a knack for grabbing headlines. After the A D Shroff memorial lecture of October 26, 2018, where he forcefully made the case for central bank independence, he apparently stated during the RBI's central board (CB) meeting on December 14 that fundamental changes in the role of the board along the lines of the US Federal Reserve or the Bank of England would require a full-fledged reconstitution of the board. Presumably what Acharya meant was that if the RBI
is to be a wholly board-driven central bank, the present CB configuration, framework and rules of business won't do.
Is that so? There is nothing in the RBI
Act of 1934 that requires the CB to perform only in a purely advisory capacity. On the contrary, section 7(2) of the Act states, do all acts and things which may be exercised or done by the Bank" (emphasis mine).
According to the law, therefore, the CB is expected to play a supervisory and oversight role. Are procedures in place that allow it to effectively do so? The answer is 'Yes'.
At present, the CB comprises the governor, his four deputies, a member representing each of the four local boards, seven directors nominated by the central government, and two government officials who are from the Ministry of Finance (MoF). While the CB must meet at least six times a year - and once in each quarter - additional meetings can be convened as needed. Except rate-setting, which is left to the members of the Monetary Policy Committee, much of the CB's supervisory work is delegated to its sub-committees. For instance, there is a sub-committee consisting of board members who, through a defined roster, meet every Wednesday to discuss, review and approve the RBI's various decisions and proposals. Notwithstanding the roster, any board director can attend and participate in these weekly meetings.
My point is simple enough. To the best of my understanding, no significant decision of the RBI
barring rate setting has been taken without the approval of the Central Board or its delegated bodies. These include important ones like early recognition of stressed assets of February 12, 2018 or the Prompt Corrective Action (PCA) framework of April 13, 2018.
What, then, might be Acharya's gripe with the present CB? As I see it, it is not about board processes, but that some directors are now questioning the management more than ever before on all sorts of issues. Though Acharya doesn't explicitly say so, three of these are Subhash Chandra Garg and Rajiv Kumar representing the MoF, and S Gurumurthy of the Swadeshi Jagran Manch.
To understand Acharya's complaint, it is important to realise how key RBI decisions were taken in the past. Prior to Shaktikanta Das, three of the governors since 1991 were from the IAS with extensive stints in the MoF. Though not an IAS, Bimal Jalan was secretary of finance and banking; and C Rangarajan enjoyed close working relationship with those who mattered in North Block.
These governors frequently conferred collegially with their MoF counterparts. There were differences especially on interest rates; but there was a clear line of communication such that, by and large, the RBI got what it wanted. This led to a situation where successive governors had the executive space to treat the CB as a de facto advisory and fact-sharing entity, contrary to its role under section 7(2) of the Act. Equally, over the last several decades, though many CB members represented some of the best industrialists, corporate leaders and policy specialists of the land, most were content in being seen as advisors and not as active fiduciaries.
Illustration by Binay Sinha
Things changed under the tenures of Raghuram Rajan and Urjit Patel, which saw bad loans assume horrendous proportions, necessitating tough action by the RBI. Here lay the rub. The RBI wanted very strict accounting and income recognition standards coupled with early detection and corrective actions that would necessarily constrain the operation weaker banks. The government wanted some leeway.
For all his brilliance, Rajan was too wedded to the idea of unquestioned central bank independence. Thus, the kind of regular tête-à-têtes needed to seek the MoF's consent in an increasingly difficult time did not occur sufficiently enough during the second half of his tenure. But such was his persona, that Rajan got his way.
Patel's situation was far worse. Gaining office after signing the Faustian demonetisation pact, he was expected to be accommodative. He wasn't - even less so than Rajan. Moreover, as the governor, he was uncommunicative with his colleagues, his staff, the public and civil servants of the MoF. If anything needed discussion, it was only with the finance minister or the prime minister. As the banking problems became larger with every passing quarter, the channels of communication between the RBI and the MoF effectively broke down. When the RBI started prescribing bitter medicine, it had no MoF allies to speak of. Only enemies.
Things have changed with Das assuming governorship. An IAS with solid MoF experience, he knows how to reach out to the government. He also knows how, when and what to speak.
Here's my unsolicited advice to Acharya. First, it will do him and the RBI good to keep his counsel in CB meetings and speak only on technical topics where he has expertise. Second, he must understand that many boards have to suffer the odd gadfly - one who seems to know everything and hogs speech time. Good chairmen know how to handle them, as I am sure Das can. And third, trust your new governor. Just because he is from the IAS and doesn't carry a PhD from a US university does not make him unsuitable for the task. If anything, Das will pour oil on troubled waters, and save the RBI's reputation. Dr Acharya, place your bet on it.
The writer is an economist and chairman of CERG Advisory Private Ltd