RBI punishes KC Chakrabarty, but move raises critical issues

Source : www.moneylife.in

August 04, 2010 11:57 AM 

Sucheta Dalal

RBI’s decision to strip Dr KC Chakrabarty of many important portfolios raises broader issues about transparency in the central bank’s functioning

The Reserve Bank of India's (RBI) decision to strip deputy governor Dr KC Chakrabarty of many of his powers on 3rd August has caused a flutter in the banking and financial world. While there are plenty of those who correctly argue that the outspoken Dr Chakrabarty had no business expressing a view different from the official line so soon after the monetary policy (he said that the central bank would have no option but to raise its key policy rates more to control runaway inflation), it has also raised issues about the central bank's independence and whether contrary views are permitted within the central bank.



On 3rd August, the RBI stunned bankers by stripping Dr Chakrabarty of important portfolios such as urban and rural cooperative banks, administration, personnel management, Right to Information and Payment & Settlement Systems.

We learn that Dr Chakrabarty has been very vocal about his views within the bank and even had a spat of sorts with some bank chiefs in a meeting prior to the announcement of the credit policy. Bankers tell us that the RBI itself was keen to raise rates more aggressively, but softened its decision after a meeting with the finance ministry. 

These bankers say that while the RBI governor may have publicly protested the finance ministry's move to encroach on its autonomy with regard to settling jurisdiction issues, it is a fact that the governor takes cues, if not instructions, from the finance minister before deciding interest rate changes. This time too, there are rumours that the RBI softened its stand after a meeting at Delhi.


Interestingly, while governor D Subbarao may have stripped Dr Chakrabarty of key portfolios, he personally was a hot topic of discussion on the banking grapevine. Having taken a stand against the finance ministry's views on the Security & Insurance Laws (Amendment and Validation) Bill 2010 on regulatory jurisdiction, there were rumours that Dr Subbarao would step down. However, the Bill has been passed without any such move on his part.


Interestingly, while Dr Chakrabarty's outburst was an anomaly, he has plenty of sympathisers who are raising issues that are bound to haunt the RBI in the coming days. For instance, many question whether the RBI allows any dissent in the discussion process. They also want some transparency and accountability in its decision-making process. For instance, it is pointed out that barring the European Central Bank, most leading central banks publish monetary policy discussions in the public domain after a lag of six to eight weeks. It is these discussions that reveal to the world whether a specific central banker is a policy hawk or a dove. More importantly, they are forced to be accountable for their views and argue them out.

Without any transparency whatsoever, in any aspect of RBI's functioning, there is no way for people to know the process of arriving at policy decisions. For instance, is monetary policy dictated by a powerful governor or the result of a frank and open discussion? Does the RBI then stick to its decisions or is it influenced by the finance ministry to modify its stand?

If governor Dr Subbarao is really keen on preserving RBI's autonomy, voluntary disclosure and more transparency will be an important step. If the RBI decides to release its discussions with a lag, it will be the best way of guarding against interference and influence by the finance ministry.

By the way, if the RBI does this, it must take care not to go the way of the Securities and Exchange Board of India. The capital market regulator took the bold decision to put its board agenda and the minutes of its decisions in the public domain. But the manner in which it functions and what is reported to the public has done nothing to enhance confidence in its functioning.