Let me start with the disclaimer, the cacophony around proposal to withdraw currency note of Rs 2000 denomination is not the pretext as such the reader may avoid getting colored.
The Reserve Bank of India’s existence has not always been easy. In undisguised terms, India’s central bank and treasury have been at odds for as long as the central bank has existed.
Just to put a perspective, John Maynard Keynes, one of the greatest economists in history, initially proposed the idea of an independent central bank for India “on a level of authority with the treasury” under the British Raj. Keynes’ proposal was shot down by the then Bank of England chief, Montagu Norman, who described the relationship between the RBI and the Bank of England as “a Hindu marriage” in which RBI is the obedient woman akin to a subservient wife to the dominant husband.
“Norman’s graphic simile is… expressive of the RBI’s real status after its creation,” wrote the former RBI economist Anand Chandavarkar in a 2005 Economic and Political Weekly article. Among the pioneering economists who built up RBI’s research prowess in the post-independence era, Chandavarkar considered RBI to have been more independent during the British Raj than in independent India. As RBI assumed quasi-fiscal mandates in order to fulfil plan targets set by the powerful Planning Commission (Now NITI Ayog), it became an “emasculated fiscal agency”, in his words.
A wide range of tasks that RBI performs as mandated under RBI Act 1934 and Banking Regulation Act 1949, including 1) Formulation and Execution of Monetary Policy to achieve stability in Currency and Credit system , 2) Supervision and Regulation of Banking and Non-Banking Financial Institutions both in relation to Operations and Solvency, 3) Regulation of Forex Market, Govt. Securities Market, and Money Market, 4) Management of Forex Reserve 5) Banker, Financial Advisor and Debt Manager to Central and State Govts 6)Banker to Banks 7) lender of Last Resort 8) Issuer of Currency 9) Developmental Role i.e. Priority Sector Lending, Lead bank schemes & 10) Policy Researcher and Data Disseminator
Throughout history, the Union government has deployed three levers to control the RBI. The first lever is the colonial-era RBI Act, which provides sweeping powers to the government. Section 30 of the RBI Act for instance, allows the government to “supersede” the RBI central board. Section 58 circumscribes the powers of the central board to make regulations only with the “previous sanction” of the central government. Section 7 (1) says that the Union government can “from time to time give such directions to the (central) bank as it may, after consultation with the governor of the bank, considered necessary in the public interest”.
These provisions aren’t invoked as a matter of routine but can be used when needed. Towards the end of Patel’s tenure in 2018, it was section 7 that was invoked to make RBI toe the finance ministry’s line on a range of contentious issues.
The second lever of control lies in the choice of governors and deputy governors to run RBI. Since independence, seven out of every ten RBI governors have been former finance ministry officials, an analysis of RBI’s annual reports shows. Such as Y V Reddy joined as deputy governors before becoming governor. Others such as D Subbarao or Raghuram Rajan were directly appointed as governors after their stints at the finance ministry.
Over the past three decades, 62% of RBI’s top management — governors and deputy governors — have been outsiders. All were men. Three women who made it as deputy governors during this period — KJ Udeshi, Usha Thorat and Shyamala Gopinath — were all insiders. The last and only time an insider took up the top post was when M Narasimham, a contemporary of Chandavarkar, became the governor in 1977.
Demonetization rendered 86 per cent of India’s currency illegal and left the RBI struggling to cope with the aftermath. Ill-prepared to deal with a policy transition of this scale, the bank kept announcing measures and then revoking them and was vilified as the ‘Reverse Bank of India’. This was perhaps the beginning of the RBI’s rocky relationship with the finance ministry.
While RBI remains an important institutional organ yet there exists a conflict-of-interest situation vis-a-vis government for the simple cause, the government of the day tends to advocate in favor of relaxed regime as opposed to the fundamental objectives of RBI i.e., to regulate or control. And this is precisely why its important the RBI governor is someone who not only excels in his custodian role but also extremely good at striking a right balance between the aspiration of a democratically elected government and the quintessential control framework inspired by economic prudence.
The third lever of government control lies in the composition and staffing of RBI’s central board, RBI’s highest decision-making body. Under the RBI Act, the central board is designed to consist of 21 members: the governor and four deputy governors [under Sec 8(1)a], four directors from the four regional boards of the RBI [under Sec 8(1)b] who are elected by their respective local board members, 10 directors nominated by the Union government who are usually experts in their respective fields [under Sec 8(1)c], and two government appointed officials (usually from the finance ministry) [under Sec 8(1)d].
In a big milestone for India, RBI Governor Shaktikanta Das, earlier this week, was awarded the ‘Governor of the Year’ award for 2023 by the international publication Central Banking. Former governor Raghuram Rajan was the first to be conferred the title back in 2015 from the country.
Since taking charge, Das faced a series of challenges during his tenure, including the collapse of a major non-bank firm, the Covid-19 pandemic, Russia’s invasion of Ukraine and its inflationary impact, and concerns about potential contagion risks linked to public sector bank loans. Despite the challenge, Das’s leadership was crucial in maintaining the stability of India’s financial sector. Here’s a look at a few of his key policies which have been much applauded.
ILFS collapse and liquidity crisis
The Indian financial sector faced significant challenges in recent years, including the collapse of major non-bank financial company IL&FS and subsequent liquidity issues. However, under the leadership of Reserve Bank of India Governor Shaktikanta Das, progress has been made in addressing these problems.
Das implemented measures such as a revised bankruptcy code and liquidity rules for non-banks, and drove improvements in the banking sector, including a reduction in gross NPAs at public-sector banks from 15% in 2018 to 6.5% in September 2022.
Although challenges remain, such as the government’s control over key regulatory decisions on PSBs, analysts believe that an imminent crisis is unlikely and ongoing clean-up efforts may bode well for the sector. The RBI has also taken steps to demand higher standards of governance and risk management from financial firms, including PSBs, leading to improvements.
Covid crisis
The impact of Covid on India and the RBI’s response under Governor Shaktikanta Das. Despite intense political pressure, Das managed the crisis by creating a bio bubble and implementing policies with sunset clauses, such as the government securities acquisition program.
The RBI used its reserves to cushion the impact of major shocks and prevent disorderly market conditions. While navigating a sometimes contentious relationship with the government, Das maintained a pragmatic and communicative approach, allowing for direct press briefings and a public awareness campaign.
The RBI’s response resulted in one of the fastest recoveries worldwide.
Payment solution
The Indian government’s implementation of Aadhaar and basic bank accounts, alongside the success of the RBI’s Unified Payments Interface (UPI), has led to a revolutionary growth in electronic payments in India. UPI has enabled instant electronic payments to millions of people, making it one of the world’s most advanced payment platforms.
India now holds nearly 50 billion real-time transactions, with ACI dubbing it the world’s largest real-time payments market.
Moreover, under Das’s leadership, RBI has also overseen the upgrade of India’s real-time gross settlement system, as well as trials for central bank digital currency (CBDC), while maintaining a cautious approach to crypto assets.
In June 2014, Das was appointed as the Union Revenue Secretary by the Appointments Committee of the Cabinet (ACC), where he served until August 2015. Later, in August 2014, he was appointed as the Union Economic Affairs Secretary by the ACC, where he served until May 2017. During his tenure, he played a crucial role in implementing major policy initiatives such as the Goods and Services Tax (GST) and the demonetisation drive.
After retiring from the IAS, Das was appointed as a member of the Fifteenth Finance Commission by the ACC, where he played a crucial role in formulating fiscal policies. He was also appointed as India’s Sherpa to the G20 by the ACC, where he represented India in various international forums.
In December 2018, he was appointed as the Governor of the Reserve Bank of India, a position he holds to this day.
Shaktikanta Das’ Life As an RBI Governor
Being the Governor of the Reserve Bank of India (RBI) is a critical role that comes with significant responsibility. Shaktikanta Das, who took office in December 2018, was entrusted with overseeing India’s monetary policy and maintaining financial stability in the country.
Das’ appointment was met with mixed reactions, with some experts praising his experience and expertise in financial affairs, while others expressed concerns about his independence from the government. Nevertheless, he assumed his role with a positive response from the market, with stocks rising after his appointment.
As RBI Governor, Das managed the Monetary Policy Committee, which sets interest rates and aims to control inflation. He also oversaw the regulation of the banking and financial sector, working to strengthen the financial system and protect consumers.
Under his leadership, the RBI introduced several measures to support economic growth, including easing lending rules for banks and providing liquidity to the financial sector. He also oversaw the implementation of the government’s relief measures during the COVID-19 pandemic, such as loan moratoriums and stimulus packages.
Das’ efforts to strengthen the financial system and support economic growth were recognised when he was awarded the National Banker of the Year, Asia-Pacific 2020 by The Banker magazine.
Overall, being the Governor of the RBI is a challenging role that requires expertise in finance, economics, and policymaking. Shaktikanta Das proved to be a competent leader during his tenure, working to maintain stability in India’s financial sector and support the country’s economic growth.
Shaktikanta Das has proven himself to be a competent and visionary leader during his tenure as the Governor of RBI, India. His ability to navigate challenging economic conditions and introduce innovative policies has helped promote India’s financial stability and economic growth. With his transparent and inclusive approach, there is no doubt that he will continue to be a valuable asset to the Indian economy in the years to come.
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