By M D Nalapat
There is a possibility that the demonetisation announced on 8 November
had been discussed threadbare within the RBI much before that date.
On
January 20, Reserve Bank Governor Urjit Patel and others are expected
to testify before the Public Accounts Committee (PAC) of Parliament on
the 8 November 2016 announcement extinguishing at four hours’ notice,
86% of India’s currency. Because government agencies are—seven decades
of “independence” later—still faithful to the colonial practice of not
trusting natives with information, all that is available to go by are
newspaper reports. These claim that the RBI has written to the committee
that it had been “advised on 7 November by the government to recommend
the (demonetisation) measure, which it promptly did”. The impression
conveyed through this missive is that the RBI has been railroaded into
backing the 8 November measure by an omnipotent government. Hopefully,
such an impression is incorrect. Else, it will be recorded that the
Reserve Bank of India has become a not very significant department of
the government, rather than the autonomous institution the Central bank
of any major market economy is presumed to be. The lightning response of
the RBI and its Board of Directors to the “advice” proffered by the
“government” is explainable only in the context of two competing
hypotheses. The first is that the RBI Board has become a mere rubber
stamp, jumping to attention and approving any policy urged on it by the
government. It is clear from the speed of the RBI’s response to the
advice it got a day earlier that only a rudimentary examination of the
matter would have been carried out at that point in time by the Central
bank, which has more than a few excellent economists within its portals.
The fact that the recommended policy got approved in such a short time,
despite its complex and hugely consequential nature indicates,
according to this view, that the RBI has transferred its core
responsibilities to the government.
However, there is a second possibility,
which is that the demonetisation announced by Prime Minister Narendra
Modi on 8 November had, in fact, been discussed threadbare within the
RBI much before 8 November, so that the Governor and the Board of
Directors therefore went through only a pro forma examination and
approval of the scheme on 7 November, in view of their having been in
favour of the measure well before it was announced. Were RBI Governor
Patel to have had any doubts about the 8 November measure, he would have
expressed them earlier to the government. Surely the Governor and the
Board of Directors of the RBI are not a collection of individuals
helpless in the face of any “advice” coming from the government of the
day. If the Governor and his colleagues disagreed with the
demonetisation decision, and if his views were ignored, surely Patel
would have sent in his resignation. However, from the start the RBI
Governor has shown no signs of recalcitrance, standing fully behind the
policy. Given that monetary policy is, in practice, the responsibility
of the Central bank, the widespread perception that he and his
institution were railroaded into going along with a measure that they
may have had doubts about is doing substantial damage to the global
reputation of the RBI. Should the view take hold that the present RBI
Governor is but a postman, carrying communications back and forth, but
without any actual input in the policy process, Urjit Patel would earn
the reputation of being the least impressive Governor in the history of
the Reserve Bank of India. Hopefully, on 20 January, Governor Patel will
clear his name by confirming that the 8 November policy had been
exhaustively researched by him before being approved. That the RBI was,
from the start, at the core of planning a policy that was boldly
announced by the Prime Minister despite the huge political risk to him.
After all, by tradition and longstanding practice, the rupee stops at
the door of the RBI Governor and not that of the Prime Minister, which
is why the signature on the new currency notes is that of Patel, rather
than Modi.
It would be apparent even to those extravagantly praising
the 8 November measure that the manner of its implementation—if allowed
to continue — may significantly damage confidence in not just the rupee,
but the banking system as a whole, specifically the RBI. Pushing
through the measure without ensuring liquidity at the level needed for
economic expansion was an act of monetary risk-taking on a
record-breaking scale. Hence, the importance that the Reserve Bank of
India as well as the Finance Ministry officials testify in public as to
why they believe such a step was essential, including in its timing and
phasing. The multiple amendments to the orders given to the banks,
almost all of which went contrary to the promise of the RBI Governor
that each rupee note would be honoured in full on presentation, have
made the RBI a focus of comments across the globe, few of which is
complimentary. The PAC hearings present an opportunity for the RBI
Governor and Finance Ministry policymakers to demonstrate that India is
not a banana republic, where momentous policies get decided overnight
and without adequate study, and whose Central bank lacks any authority
or indeed a role in the framing of monetary policy. Governor Patel needs
to redeem the RBI’s name by stepping forward and taking responsibility
for a measure that he must have been very much in favour of, doubtless
for good economic reasons that he needs to elucidate publicly. Patel
should also clarify that his backing for the move was no split second
decision, but was carefully considered and cleared much before 8
November 2016.
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