Less metaphor, more dialogue

The relationship between the central bank and the treasury of any country is never easy. There is an inbuilt tension, not because of conflicting objectives, but because of instrumentality. An example might illustrate this. A fiscal discipline law limiting the deficit is an instrumentality. It does not mean that the law is in conflict with fiscal freedom of policy makers. It just means that the tendency for fiscal profligacy has to be curtailed by an instrumentality which takes away discretion. 

The central bank is given instrumental independence from the government, even though their objectives are aligned, i.e. growth and stability.  There are good conceptual reasons for giving instrumental independence to the central bank. The theoretical literature and international evidence on this is voluminous, but this is not the space to recount it. This does not mean that the received wisdom is cast in stone, on what this independence entails.

Similarly, the central bank is given instrumental independence from the government, even though their objectives are aligned, i.e. growth and stability.  There are good conceptual reasons for giving instrumental independence to the central bank. The theoretical literature and international evidence on this is voluminous, but this is not the space to recount it. This does not mean that the received wisdom is cast in stone, on what this independence entails. There is also the ongoing and periodic reassessment of monetary theory itself. Take the example of inflation targeting. This became popular in the last three decades, and India adopted it formally just two years ago. But even as we embark on this, the original pioneers, countries like New Zealand have abandoned it, after reconsideration post the 2008 crisis. 

The current debate between the Reserve Bank of India and the government, would have been healthy and productive, if it were conducted away from the public eye. But once it spills out into the open, especially in the media, then the discourse spins out of control. Then positions on the opposite side of the debate can quickly harden into binaries of “with us or against us”. This is what seems to have happened in the past few weeks, following two public speeches of Deputy Governors. The speeches also followed the RBI’s public response in court in a case filed for relief on its new loan restructuring guidelines (the so called “February circular”). The RBI has also put in a dissenting note against the proposal for a separate regulator for the newly introduced payments banks.

All of the four current issues are considerably complex: the adequacy of RBI’s reserves, the dilution of the February circular, some relaxation of the PCA restrictions, and finally of infusing liquidity in the financial markets. These require technical expertise, a deep understanding of the current context tempered with pragmatism, and a readiness to reconsider stated positions. Certainly not something that can be summarised in a metaphor or a tweet.

The narrative soon was filled with evocative metaphors being used freely. The first one was used by a Deputy Governor, who used cricket to say that the RBI was playing a test match whereas the government was into T20s. That same sentiment expressed in a more staid manner, would be expressed as follows. That the time horizon for a government in office tends to be much shorter than that of monetary authorities. Hence decisions based on short term considerations, especially front-loaded gains, can lead to negative long term consequences, beyond the term of the policy makers. But this is not as evocative as cricket! Another metaphor was the “Latin Liturgy syndrome”, used by a former board member of the RBI. She said that the RBI must be willing to explain and articulate its position in a simpler, non-abstruse way. Indeed, it must be answerable to queries put forth by board members, or by the government. The RBI cannot be like high priests who will speak in Latin or not at all. A third metaphor was in reference to the Prompt Corrective Action (PCA) framework. The RBI has slapped the PCA restraint on eleven public sector banks stopping the issue of new credit, until the older bad loans are fixed, and some other conditions are met. A senior government official said that PCA should not mean that the banks are imprisoned in a “Hotel California” situation, i.e. permanently stuck in a credit freeze. This is one of the many contentious points of debate, wherein the government wanted the RBI to allow some PCA banks to resume their lending activity. Another metaphor used for the RBI and government, was “Vikram and Betaal” describing the inseparable but antagonistic duo, 

Thankfully the recent marathon meeting of the board of RBI, which has representatives of the government as well, seems to have been productive. Cooler heads have prevailed, and there is a spirit of a cooperative approach, with some give and take, and a focus on consensus. On some of the thorny issues, expert committees will examine at length the next course of action. 

Metaphors are useful shorthand to understand complex concepts, but they are not the real thing. And in stressful and contentious times such as these, they may be of limited use. Dialogue and debate with utmost restraint, and away from the public glare is the only way forward. All of the four current issues are considerably complex: the adequacy of RBI’s reserves, the dilution of the February circular, some relaxation of the PCA restrictions, and finally of infusing liquidity in the financial markets. These require technical expertise, a deep understanding of the current context tempered with pragmatism, and a readiness to reconsider stated positions. Certainly not something that can be summarised in a metaphor or a tweet. Thankfully the recent marathon meeting of the board of RBI, which has representatives of the government as well, seems to have been productive. Cooler heads have prevailed, and there is a spirit of a cooperative approach, with some give and take, and a focus on consensus. On some of the thorny issues, expert committees will examine at length the next course of action. 

It is good that this storm was contained in the proverbial teacup (note metaphor!). The debate can continue away from the headlines. The institutional autonomy and independence of the RBI is very important for its credibility and reputation. The latter is a precious and fragile thing, and needs to be protected and preserved. But ultimately the central bank’s independence is within the context of the sovereign, represented by the government. As former RBI governor Y V Reddy said, the RBI is not independent of its creator, which is the government, not the constitution of India.

(The writer is an economist and Senior Fellow, Takshashila Institution)