The RBI Act may have been amended several times. But the preamble continues unchanged. Ipso facto, RBI is still a temporary institution and we still don’t know what a permanent central bank should be. RBI is a central bank and in any country a central bank’s primary role is monetary policy, which it should pursue independently, though different gradations and definitions of independence are possible. Note, one isn’t talking about the Bank of England, the European Central Bank or the US Federal Reserve alone. The People’s Bank of China is far more independent than RBI is.

According to media reports, two claimants for the RBI governor’s post were interviewed by the finance minister and a decision taken. This is a far cry from the chairman of the Federal Reserve being confirmed by the Congress. Alternatively, ask the question as to who constitutes RBI’s board of directors and how independent this board is. Should banking supervision be under RBI or is that best done through an independent government agency? Can monetary and exchange rate policy ever become independent if public debt management remains RBI’s primary focus? Even if one forgets earlier committees (including Tarapore-II on convertibility), there have been two recent reports — the Planning Commission-sponsored Raghuram Rajan (RR) committee on financial sector reforms and the Percy Mistry (PM) committee on making Mumbai an international financial centre. Much has been made of why two different committees were needed and the nitty-gritty of their recommendations. RR sounded less radical and more politically correct than PM. However, both agreed on reforming RBI. PM documented RBI’s control mindset. RR said it was inevitable if RBI was entrusted with public debt management, requiring government banks and control on private sector entry. The language and sequencing might be different, but PM and RR were barking up the same tree.

For instance, even RR flagged unnecessary intervention in forex markets, the move of some regulation to SEBI and the required shift to inflation-targeting. Though not quite articulated in that fashion, RR also agrees with PM’s points that financial markets (banking, insurance, capital markets, asset management, derivatives) should not be artificially fragmented, segmented and compartmentalised. The UPA is close to its full term and has been unable to move on financial sector reforms (pensions, insurance, voting rights to foreign investors in banks). A quote from RR is in order: “Clearly, there is little urgency for reforms because India is not in a crisis. This is where the political leadership is of essence. Reforming in crisis is similar to driving with a gun to your head — you pay more attention, but there is much greater risk of accidents.”

The argument that with the Left out of the way, financial sector reforms will move is a non-starter. That’s certainly not the case where legislative changes are necessary. However, not everything requires changes in legislation. RBI’s exchange rate management (limits on external commercial borrowings, prevention of rupee appreciation) is one instance. The independent debt management office is another. It is true that North Block is reluctant to let go of RBI and exchange and interest rate policies have been influenced, if not determined, by the finance ministry.

However, independent debt management office is different, probably because this will be located in the finance ministry. But wherever it is located, this is a desirable move, since interest rates then become a true monetary policy instrument, and some upward pressure on interest rates is reduced. Fiscal deficits (though they hide several off-budget items) and FRBM targets are healthy enough for this transition to be possible. Before a full-fledged and independent debt management office, the intermediary proposal was of a middle-office in the finance ministry. Stated differently, North Block wanted this reform, even if it didn’t want others and RBI under Y.V. Reddy didn’t seem very keen. Earlier, under Bimal Jalan (1997-2003), the argument was that public debt management couldn’t be de-linked from monetary policy as long as deficits were high. Subject to the caveat mentioned, that’s no longer a valid argument.

This is what RBI has to say on its governors: “Few personalities are so close to and yet so distant from India’s populace as the governor of the Reserve Bank and few evocative of his awe and mystique: close, because virtually every individual, be he ever so poor or so rich, carries on his person the promise and signature of the governor. Awe, they command as the custodian of the country’s reserves and defenders of the external value of the currency. And mystique, they possess as purveyors of money, the commodity all desire but so few understand.”

Everyone may not understand money. But everyone understands notions of transparency and independence. Perhaps because of the distance and mystique, ranking RBI governors isn’t as common as ranking FMs. However, if you judge by RBI’s own website on its governors, reforms are flagged more under C. Rangarajan (1992-97) and Bimal Jalan (1997-2003) than under Y.V. Reddy (2003-08). Reddy’s listings are more personal accomplishments. Beyond rates (which are manifestations), reforms (unlike crisis management) are the true test of any RBI governor’s success and this not only means banking reforms (which have continuously occurred in incremental fashion), but also central banking reforms. RBI needs to re-invent itself and this is more difficult than managing crises, which is what P.C. Bhattacharya (1962-67) and S. Venkitaramanan (1990-92) had to undertake in different contexts. That re-invention could have happened under Y.V. Reddy, but didn’t, despite the India Shining (GDP growth, forex reserves, low inflation earlier and low deficits) story.

D. Subbarao’s (2008-11) yardstick for success will be this and it is unclear what one should make of a three-year term as opposed to a five-year one. Nor is it clear who might drive such reforms best — someone from North Block, an insider from RBI or a complete outsider. Once RBI is de-constructed, perhaps selection processes will become more transparent and one will have more answers than questions.

The writer is a noted economist

express@expressindia.com