Thank God, the Reserve Bank Exists
The crisis over the last five years has reopened some fundamental questions about central banks - their mandates, the limits to their autonomy and the mechanisms through which they render accountability. These questions are playing out in India too. Several committees have suggested that the mandate of the Reserve Bank of India (RBI) should be narrowed on the argument that its currently broad mandate is diluting its focus on price stability - the core concern of monetary policy. The Financial Sector Legislative Reforms Commission which submitted its report to the government in March this year has argued that the mandate of the RBI should be restricted to monetary policy and regulation of banks and the payment system.
In the context of the mandate of central banks, one needs to keep in mind that the global financial crisis was a powerful rebuke to central banks for neglecting financial stability in the pursuit of price stability. In the immediate aftermath of the crisis, which saw the US Fed and other central banks provide liquidity in spades and use unconventional tools, a consensus had emerged that financial stability needed to be explicit in the objectives of monetary policy. Put differently, the fundamentalist view of a central bank with a single-minded objective (price stability), and a single instrument (short-term interest rate) is being reassessed across the world.
The jury is still out, but a consensus is building around the view that central banks now need to balance price stability, financial stability and sovereign debt sustainability. There are no easy answers. But there are certain tenets that must inform the thinking over this issue. First, the fundamental responsibility of central banks for price stability should not be compromised. Second, central banks should have a lead, but not exclusive, responsibility for financial stability. Third, the boundaries of central bank responsibility for sovereign debt sustainability should be clearly defined. Fourth, in the matter of ensuring financial stability, the government must normally leave the responsibility to the regulators, assuming an activist role only in times of crisis. The crisis has made a strong case for a more expanded role for central banks. Do we ignore all that, and fall back on the old understanding of what a central bank should or should not do to change the RBI's remit and scope of influence?
Related to all this is the question about the limits to the autonomy of the Reserve Bank and where and to what extent it should defer to the executive. Finally, there are also questions about the accountability of the Reserve Bank for the outcomes of its policies.
As Governor of the Reserve Bank, I not only welcomed the debate on these issues, but even encouraged it, in the firm belief that such a debate is in the larger public interest.
Admittedly, the Reserve Bank has a mandate that is wider than other central banks. This is an arrangement that has served the economy well. There are synergies in the various components of the Reserve Bank's mandate and we should not forefeit those synergies. Surely, our institutional structures must adapt to the changing socioeconomic context, but any such change must be brought about only after extensive debate and discussion.
In a full length feature on the RBI in 2012, The Economist had said that the RBI is a role model for the kind of full service central bank that is back in fashion worldwide. It is also important that the mandate of the Reserve Bank is written into the statute, so that it is protected from the political dynamics of changing governments.
In the opening part of my lecture today, I explained the rationale for an autonomous central bank. Like in most other developing economies, the Reserve Bank was not born autonomous; it gained its autonomy over time as a result of the lessons of international experience and the maturity of our political executive who saw the benefits of preserving the autonomy of the Reserve Bank. On its part, the Reserve Bank earned this autonomy by staying committed to the pursuit of larger public interest.
Accountability is the flipside of autonomy. The Reserve Bank of India Act does not prescribe any formal mechanism for accountability. Over the years, however, certain good practices have evolved. Let me briefly illustrate. We explain the rationale of our policies, and where possible indicate expected outcomes. The Governor holds a regular media conference after every quarterly policy review which is an open house for questions, not just related to monetary policy, but the entire domain of activities of the RBI.
The Reserve Bank also services the finance minister in answering Parliament questions relating to its domain. Most importantly, the Governor appears before the Parliament's Standing Committee on Finance whenever summoned, which happens on the average three to four times a year.
It has often struck me that for a public policy institution with such a powerful mandate, these mechanisms for accountability are both inadequate and unstructured. Perhaps, we should institute an arrangement whereby the Governor goes before the Parliament Standing Committee on Finance twice a year to present a report on the RBI's policies and outcomes and answers questions from the members of the Committee. In my view, this will not only secure the accountability structure but also protect the Reserve Bank from any potential assaults on its autonomy. I have dwelt a bit longer on this last challenge of autonomy and accountability if only because we have not debated this in the larger public domain as much as we should have. And to the Reserve Bank staff, I want to say that they must be as zealous about rendering accountability as they are about guarding its autonomy.
Thank God, the Reserve Bank Exists
There has been a lot of media coverage on policy differences between the government and the Reserve Bank. Gerard Schroeder, the former German Chancellor, once said, "I am often frustrated by the the Bundesbank. But thank God, it exists." I do hope Finance Minister Chidambaram will one day say, "I am often frustrated by the Reserve Bank, so frustrated that I want to go for a walk, even if I have to walk alone. But thank God, the Reserve Bank exists."
Edited excerpts from outgoing RBI Governor D Subbarao's speech: Five Years of Leading the Reserve Bank: Looking Ahead by Looking Back, Mumbai, August 29, 2013
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