The Hindu Business Line : Clarity on policy, please

I am utilising the opportunity of addressing an open letter to you for two reasons: One, this will be my last article in Business Line, at least for the next 12 months; and, two, the matters I intend to deal with have the potential to be historically important but clarity on these issues is conspicuous by its absence in the official policy stance.

The term of office of the Governor of the Reserve Bank of India (RBI) is five years, though it could be shorter in some cases. Once a Governor completes half the specified term, he/she has tended to so act that his/her place in history is secure.

To secure a place in history, they need discretion. Governors of the central bank have a lot of it but they are often constrained, first by the RBI Act and other legal provisions, and second, by the challenges posed by the behaviour of the market in liberalised economic regimes.

The problem with the legal constraint is that in the present system, the RBI has to collect information on the constraints that the existing laws impose and propose amendments to a number of legal provisions at one go. The political determination of the hierarchy of such proposals is done before approaching Parliament for amendments. The process is time-consuming but perhaps that cannot be helped.

Best Practices

On the question of fostering best financial market practices in India, the Government of India and the RBI jointly sponsored, between 1999 and 2000, a series of working/study groups on different financial segments. The group reports appeared in the subsequent two years. The central bank has also published an academic's evaluation of the reports.

All the group reports emphasised the need for flexibility in the application of International Standards And Codes (ISC) to be consistent with the country's institutional and legal context. They also suggested what may be called Indian versions of ISC.

With the last few years' experience, the RBI is now in a position to construct an empirical evaluation of compliance or forbearance to the Indian version of international codes. Such evaluation would offer insights into the extent of consistency of regulations with the fostering of the Indian version of ISC and on whether the regulations need to be reoriented to move toward ISC.

Governance Issues

In addition, there are other matters that need urgent attention. Let me take up the issue of corporate governance in the central bank — the subject of my article in the Business Line of December 9, 2004.

Keen observers of central banking would be curious to ask questions about the very size of the Central Board of Directors (CBD) and the role of the Local Boards (LBs). The CBD has at least 14 members, besides the RBI Governor and the four Deputy Governors. The degree of accountability of the members of the CBD on the apex bank's actions needs to be spelt out in greater detail than before.

Besides, one needs to ask whether the Annual Report should consist of two parts, as at present, or if it should deal exclusively with the RBI's functioning earlier on in the Report rather than in the second part, as is done now. The international best practice is to have annual reports distinct from an organisation's economic assessments.

There are four Local Boards to represent the western, eastern, northern and southern areas of the country, each with three-five members. In each of the LBs, a member of the CBD acts as the chairperson. But this arrangement by itself does not assure that interactions between the LBs and the CBD are effective.

The above questions have a bearing on the advisability of having a Monetary Policy Committee (MPC) as in many other central banks. If an MPC is formed, can it coexist with the CBD? Or, should the latter be dissected into different committees dealing with such specialised areas as monetary policy, financial stability and operational issues? Is it politically feasible to eliminate the CBD altogether and have different Committees in its place?

The RBI has, at present, a Technical Advisory Committee on Monetary Policy (TEC), the formation of which is much hailed in the official reports. But whether it is a credible enough institutional mechanism or made more effective is a question that has not been posed.

For example, can one expect a member-external to the RBI in the TEC be to present, at least as an observer, at the time of the discussion in the CBD on monetary policy initiatives? The observer's silence at the discussion would imply that the presentation by the RBI official of the TEC's findings reflects the flavour of the discussions at the TEC.

There is the question of inflation expectations, on which no authentic official study has emerged as yet. There is, however, a market buzz that the RBI does conduct a survey on this matter but is surprisingly reticent about it. Whether this survey forms the basis for the Governor's recent espousal of the need to distinguish inflation expectations from what he has termed `inflation perceptions' is not clear. One hopes the public would soon be provided with details of the content of inflation perceptions.

Critical to reforms

The issues raised here are critical for enhancing the organisational efficiency and accountability — elements that are essential for financial reforms to be credible.

The talented staff of the RBI requires the Governor's nod to generate in-depth studies in the form of working papers on corporate governance as much as on monetary policy and financial stability issues instead of frittering away their energies in servicing the working/study groups.

No doubt, the working group route to interactive processes of learning has been useful. But it does not allow individual talents of the staff to flourish and to be recognised outside the organisation. Besides, it tends to cripple the growth of research publications, namely the Bank's Occasional Papers.

The current growth optimism provides you the best opportunity to be on the golden pages of the future of the Reserve Bank of India.

Asuri Vasudevan

(The author, a former Executive Director, Reserve Bank of India, can be reached for clarifications at asurivasudevan@hotmail.com)

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