In post-reform India, the preamble to the RBI Act of 1934 has been quoted several times. But it is worth quoting yet again: “And whereas in the present disorganisation of the monetary systems of the world it is not possible to determine what will be suitable as a permanent basis for the Indian monetary system; but whereas it is expedient to make temporary provision on the basis of the existing monetary system, and to leave the question of the monetary standard best suited to India to be considered when the international monetary position has become sufficiently clear and stable to make it possible to frame permanent measures...” Et cetera.

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.

... contd.