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| The Hindu Newspaper Editorial Vocabulary : 29-November-2018 -For Various Competitive Exams |
In a spirit of accommodation
The RBI, the RBI board and the government must understand the limits to which they can push each other
The saying, ‘all’s well that ends well’, appears to be
most appropriate in the case of the recent spat between the Reserve Bank of India (RBI)
and the government. However, the agreement arrived at could as well have been
settled before things went public. Even though the agreement itself has raised
certain fresh questions, by and large it is a satisfactory one. Without
going into the merits
of the issues raised, two important questions have arisen, which relate to the
relationship between the RBI and the government and between the RBI management
and its board. Even if one cannot come to definitive conclusions, it is
important to note the ramifications of the issues raised.
Earlier episodes
Section 7 of the RBI Act, in a sense, sets out
the relationship between the government and the RBI. This section gives the
government the right to issue directions to the RBI in public interest.
Strangely, the framers of the Act seemed to have had in mind frequent use of
the section as it says: “The central government may from time to time give such
directions....” Leaving
that aside, it is a fact that the government had not issued such
directions. But it does not mean that the government did not have its way. When
Benegal Rama Rau resigned as RBI Governor in 1957 on an issue on which he
differed from the government, Jawaharlal Nehru wrote to him: “You have laid
stress on the autonomy of the Reserve Bank. Certainly it is autonomous,
but is also subject to the Central Government’s directions... Monetary policies
must necessarily depend upon the larger policies which a government pursues. It
is in the ambit
of those larger policies that the Reserve Bank can advise.”
The tone of the letter was harsh. Similarly, some
years later when another Governor, H.V.R. Iengar, raised the issue of ad hoc
Treasury Bills, Finance Minister T.T. Krishnamachari said: “What to my mind is
necessary is to ensure that Government policy is formulated in this respect
after very full discussion with the Reserve Bank and that the latter is kept
informed from time to time of any changes that Government feel called upon
to make before they are made.”
These episodes effectively set the tone and nature of the
relationship between the government and the RBI. In one more instance, the RBI,
in 1985, decided to allow banks the freedom to fix the interest rate on term
deposits up to maturity of one year. The government was consulted before the
circular was issued. Later, the government changed its mind. Of course, there
was some uneasiness among public sector banks and the freedom given was not
properly managed. The government wanted the RBI to withdraw the circular, which
was done. Governor R.N. Malhotra and I, at the time, Deputy Governor of the
RBI, agonised
over the issue for several hours before writing the new circular withdrawing
the earlier one. After issuing the new circular, I wrote to the Finance
Ministry reiterating
again why we had taken the earlier decision. Monetary policy measures were
never announced without the concurrence of the Finance Minister.
The recent change in the monetary policy
framework setting up the Monetary Policy Committee and giving it full freedom
to determine the policy rate is a giant step forward in terms of giving the RBI
autonomy. Literally, the Finance Minister gets to know the decision along with
others.
A distinction
But it must be noted that the first step in this
direction was taken by Manmohan Singh when he was the Finance Minister. When I
approached him to do away with the system of the issue of ad hoc
Treasury Bills which had the effect of monetising fiscal deficit, he readily
agreed to this. It was this act of statesmanship by Dr. Singh which put the RBI on the road to
autonomy. There is, however, a distinction between autonomy as a monetary
authority and autonomy as a regulator.
In the first case, autonomy has to be full once
the mandate is given. In the second case, autonomy is somewhat blurred
because the mandate is broad and vague. However, coming to the issues that were
thrown up
in the current spat, these are mostly operational and it would have been unwise
for government to use Section 7 to issue instructions. It would have sent out
the wrong signals both at home and abroad. It is good that the government has desisted
from using Section 7. Nevertheless, one must say that Section 7 hangs like the sword of
Damocles. It is important to have continuous and sustained dialogue, and an
atmosphere of give and take is much needed.
RBI and board
The second issue is about the relationship
between the RBI management headed by the Governor and the board. The debate
arose because of the contentious issues between the government and
the RBI being referred to the board. The question that has been raised is whether
the board as it is constituted today can discuss such issues and compel the
Governor to act according to the majority view.
In order to understand the relationship between
the government and board, we have to go back to Clause 2 of Section 7, which
says: “The affairs and business of the Bank shall be entrusted to a Central Board of
Directors which may exercise all powers and do all acts and things which may be
exercised or done by the Bank.”
However, Clause 3 says: “Save as otherwise
provided in regulations made by the Central Board, the Governor... shall also
have powers of general superintendence and direction of the affairs and
business of the Bank and may exercise all powers and do all acts and things
which may be exercised or done by the Bank.”
Some argue that Clause 3 abridges the powers of the
board. To me, the right way of interpretation is that both the board and the
Governor have concurrent
powers in almost all matters. The board has members nominated by the
Central government from various walks of life, including industry. It does
create a problem. This can result in a conflict of interest because the actions
taken by the RBI could directly affect their interest. Therefore, the tradition
that had evolved is that the board has largely functioned as an adviser.
Two things need to be clarified in this context.
First, it is not as if the board has not passed resolutions on matters which
are operational and policy oriented. The change in the Bank rate in the past
had the prior approval of the board. In fact, in the weekly meetings of the RBI
Board, the first resolution used to be on the Bank rate. But with the
Governor’s concurrent powers, in the past, on occasions, the Bank rate had been
changed without going to the board. Second, strictly speaking, the board has
the powers to discuss and even pass resolutions, which have been done. But
given the nature of the board and the interests of the members, it becomes
difficult to let the board to take binding decisions.
Endnote
It is, however, true that in the case of the
Federal Reserve System in the U.S., the board does take decisions with voting
if necessary. But then the nature of the board is very different. Section 7 is
a mix of things. First, it gives powers to the board, and second, it gives
powers to the Governor as well. The way the relationship between the board and
the Governor has evolved over time in India is a good one. The board by and
large has played an advisory role.
Against this background, while the Governor can
act on his own, he must listen to what the members feel and the sense of the
board must be fully reflected in his actions. The crux of the problem is that the
RBI, the board and the government must understand the limits to which they can
push. A spirit of accommodation must prevail.
C. Rangarajan is former Chairman of the
Economic Advisory Council to the Prime Minister and a former Governor, Reserve
Bank of India
01.
Accommodation
(noun) – adjustment, understanding, compromise/settlement.
02. All’s well that ends
well (phrase) – all the difficulties/pitfalls during the course of
action will be forgotten if the result is good.
03. Spat (noun)
– argument or quarrel for nothing.
04. By and large
(phrase) – generally, usually, mainly.
05. Merits
(noun) – an essential inherent quality (rights and wrongs only) while
evaluating a case (not by external aspects).
06. Ramifications
(noun) – consequence, result, outcome.
07. Sets out
(phrasal verb) – present, describe, detail/explain.
08. From time to time
(phrase) – irregularly, occasionally, now and again.
09. Leaving that aside (phrasal
verb) – neglect, ignore, snub/brush off.
10. Autonomous
(noun) – self-governing/ruling, independent, sovereign.
11. Ambit
(noun) – scope, extent, bounds.
12. Ad hoc (adjective)
– extemporary, when necessary, as the need arises.
13. Called upon (phrasal
verb) – demand, require, ask formally.
14. Set the tone (phrase)
– establish a (particular) quality.
15. Agonised
(verb) – be worried, be anxious, upset oneself.
16. Reiterating
(verb) – repeat, say again, restate.
17. Concurrence
(noun) – agreement, consensus, consistency.
18. Step forward (noun)
– progress, development, improvement.
19. Do away with (phrasal
verb) – abolish, eliminate, remove.
20. Statesmanship
(noun) – statecraft, negotiations/discussions; the skilful management of a
country’s public affairs.
21. On the road to (phrase)
– probably to achieve something.
22. Blurred (verb)
– make indistinct/unclear, make vague, unfocus.
23. Vague (adjective)
– imprecise/uncertain, ambiguous, speculative.
24. Throw up (phrasal
verb) – produce something.
25. Desisted
(verb) – stop/cease, abstain, refrain.
26. Sword of Damocles (phrase)
– it refers to extremely dangerous situation; a looming threat.
27. Sustained (adjective)
– continuous, uninterrupted, constant.
28. Contentious
(adjective) – controversial, disputable, debatable.
29. Entrusted (verb)
– assign, give the responsibility for, charge with a responsibility/trust.
30. Abridges
(verb) – curtail; lessen, reduce/decrease.
31. Concurrent
(adjective) – accompanying, coexisting, concomitant/associated.
32. Walk of life (phrase)
– class, status, rank (of a person within society).
33. Crux (noun)
– essence, most important point, central point.
34. Prevail (verb)
– prove superior/powerful; win, triumph, succeed.
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