A suitable deputy governor for the RBI

The deputy governor in charge of monetary policy, among other responsibilities, left the RBI towards the end of July before completing his term. The search for his replacement began right thereafter. Now there are reports that the government is unlikely to select anyone with a similar background for the vacant position. Somehow, an impression seems to have gained ground in official circles that putting independent-minded trained economists with some global acclaim in senior positions in the government or in the RBI is not the right thing to do. The early exit of as many as four such persons from the government and the RBI over the last couple of years, citing personal reasons, cannot be a sheer coincidence. There is certainly more to it than meets the eye.  Oddly, one has not witnessed any quality discussion on this issue in the public space.           

Pivotal role of deputy governors

Like in any other major central bank, although the governor is the most important public face of the RBI, the deputy governors are really the persons that invigorate, sustain and occasionally refurbish that face. They together run the institution. As the things stand now, the government can appoint no more than four deputy governors. At the time of RBI’s inception on April 1, 1935, the British authorities appointed two knighted gentlemen as deputy governors of the RBI, one of whom was an Indian - Sikandar Hayat Khan. His selection was essentially a political one, as it was widely known then that his views and actions were sharply at variance with the mainstream nationalist movement of those days, although he had some credentials of being a successful entrepreneur with varied business interests, including in a regional bank. He left the RBI after six months to pursue his political ambitions.

There appears to be some pragmatic but tenuous realisation that there should be at least one trained economist of some repute who could lead the monetary policy function. But with the long-held, and somewhat self-serving belief of the persons who matter that what counts most is the length of experience and the elevation of the positions attained in the government, even this bit of pragmatism is likely to get a short shrift in the days to come.

The record and performance of the very large number of deputy governors in the subsequent years and decades do not lead to any general observation, as would be the case with any other public institution in a large democracy like India. But a few indeed left their mark and legacy behind. One obvious name belonging to this exclusive category is the late S.S. Tarapore for his sharp intellect, hard-work, integrity and forthright views even on contentious issues. 

The pattern of selection of deputy governors has changed over the years. Beginning in the early 1980s, there has been a practice to appoint a top serving official of a public sector bank as deputy governor presumably to enhance the capabilities of RBI in the area of banking regulation and supervision. However, it still remains an open question if the desired outcome has been achieved, even barely, in this regard. Many have opined that the policy would have been better served if the search would not have been confined to public sector banks. Similarly, there appears to be some pragmatic but tenuous realisation that there should be at least one trained economist of some repute who could lead the monetary policy function. But with the long-held, and somewhat self-serving belief of the persons who matter that what counts most is the length of experience and the elevation of the positions attained in the government, even this bit of pragmatism is likely to get a short shrift in the days to come.                     

Central bankers require domain knowledge and expertise  

Ever since the early 18th century invention of ‘fractional reserve banking’ attributed to John Law, the job of central bankers became increasingly specialised with each passing decade. The modern main-stream central banking evolved during this period, which witnessed lots of trial and error, innovations and, of course, failures and even dead-ends. The remit of major central banks these days is to deliver macro-financial stability, even though booms and busts in the financial sector happen with frustrating regularity, because in the words of the American author and biographer James Grant ‘in finance and economics, we keep stepping on the same rakes.’

More than ever in the recent decades, India now needs strong institutional arrangements and rich capabilities for economic and financial policy-making and this cause is not served by engaging in a puerile debate on whether the RBI should submit to the wishes of the government or, for that matter, if the RBI is an extended arm of the government. Regardless of how expedient it may be to induct persons from the government without credible background into the top echelons of the RBI, such appointments will almost certainly be viewed with a good deal of doubt by the financial markets and will likely be seen as a back-door reversal of the earlier policy not to have any presence of the government in the Monetary Policy Committee (MPC).

Nonetheless, a central banker can no longer afford to be a smart generalist with a common sense approach to everything. The required skills are honed through years of intense interface with the real economy and the financial markets, among others, on the back of deep intellectual engagement that can be provided by formal training in economics or finance much beyond the baccalaureate level. Yes, there have been notable exceptions to this beau idéal, but those do not lead to any contrary conclusion in this regard.   

Economic policy-making needs strong capabilities & institutional arrangements

As the second decade of the new millennium is promising to end in a sour note for the Indian economy, questions are being raised not just about India’s long-term growth strategy but also about policy autonomy and professional competence of the RBI. No doubt, the mere mention of the word autonomy for a public institution such as the RBI generates a good deal discomfort in the minds of many who tend to equate it with defiance and discord. However, it’s time the public discourse on the relation between the government and the RBI forsakes its current monochromatic and one-dimensional proclivities. More than ever in the recent decades, India now needs strong institutional arrangements and rich capabilities for economic and financial policy-making and this cause is not served by engaging in a puerile debate on whether the RBI should submit to the wishes of the government or, for that matter, if the RBI is an extended arm of the government. Regardless of how expedient it may be to induct persons from the government without credible background into the top echelons of the RBI, such appointments will almost certainly be viewed with a good deal of doubt by the financial markets and will likely be seen as a back-door reversal of the earlier policy not to have any presence of the government in the Monetary Policy Committee (MPC).  To put it plainly, increased fiscal dominance in respect of monetary policy-making and regulation of banks and the capital markets by any means will not convey the right kind of signals to the financial markets, investors and even to the common men.    

(The writer is a former central banker and consultant to the IMF)