From best to worst for RBI?

When the Reserve Bank of India announced on Monday that there would be restrictions on deposits in excess of Rs.5000, I thought of composing an irate post on this blog, criticizing the rampant ad hoc-ism.  I did not get the time to and fortunately so, because the RBI has since done a U turn, saying the restrictions will not apply in the case of KYC compliant bank accounts.  Phew!

This latest flip flop has earned it the dubious title of Reverse Bank of India.  It’s a tragedy because the RBI has long been respected as one of the best institutions of the country. And under former RBI governor Raghuram Rajan, its stature rose further with investors like Jim Rogers and Marc Faber hailing him as perhaps the best central banker in the world.  

Indeed, it is as if Raghuram Rajan had provided the anchor that this government sorely misses now.  His trenchant criticism which stung their thin skinned selves in fact provided a solid counterweight that forced the government to eschew short cuts and take hard decisions.  Forex reserves swelled, the rupee held relatively steady and the current account deficit shrunk.  It has been argued that the last aspect wasn’t necessarily a positive for a country at India’s stage of economic development.  But in an environment of declining global trade and anti-globalisation sentiment, it was worth settling for. 

The situation is so different only three months since his exit that it is almost surreal to behold.  From the beginning of the demonetization drive, the RBI has fielded strong criticism of its perceived rubber-stamping of the govt’s decision.  Current governor Urjit Patel stoutly defended the decision during the press conference held after the December policy review but he may have to field tougher questions from a Parliamentary Panel on the 22nd of this month. 

It may have been possible to sympathize with his – and indeed the RBI at large – plight in having to go with the government decision.  While criticism for not upholding the independence of the RBI is valid, Rajan was also a singular incumbent, capable of withstanding persistent pressure from multiple flanks…and paid the price via a most ugly and unbecoming smear campaign to rush him to the exit door.

But the latest U Turn is a different matter altogether.  Surely, if the RBI did see that there was no need to cross question those depositing old notes into KYC compliant notes, they could have taken this position while issuing Monday’s circular.  Is it not too elementary to have even required a rollback under public pressure?  

Even if one presumes that there is somebody pushing buttons on a remote control to make the RBI do his/her bidding,  there’s got to be pushback against elementary blunders if at least one soul in the RBI has a semblance of  a spine.  If such pushback is not viable, it would be advisable for the key personnel of the RBI to step down with honour (or at least whatever remains of it) so the public may come to know what is happening.  

But every day that there is no pushback or no thought, as applicable, is a day that results in yet another ad hoc decision that makes the RBI, North Block, GOI et al a laughing stock and an all too easy target for cartoonists. The mocking, unfortunately, will not be restricted to the Indian media.  Thanks in part to our rapid economic growth and in part to our vociferous breast-beating brand of jingoism, what goes on in India attracts international attention and you can be sure that newspapers and magazines that normally do not pay much attention to developments in India nevertheless won’t miss the opportunity to deride the administrative failure that we are currently witnessing.    

Perhaps, the ruling dispensation is prepared to brazen it out and turn a deaf ear to criticism so as to pursue its agenda through to the end.  But it should bear in mind that the cost of destroying confidence in an institution like the RBI will not be trivial. It could mean dwindling foreign portfolio investment (already under the pump thanks to the Trump rally) and a dimming outlook in the eyes of credit rating agencies.  

Under Raghuram Rajan, a much awaited rating upgrade wasn’t out of reach.  Now the best we can hope for may be to avert a downgrade!  As they say, eternal vigilance is the price of liberty.  India has paid a heavy price for under-appreciating the importance of institutions in a democratic government. 

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