“Govt should not treat RBI at par with other departments under its control” – The Hindu BusinessLine

At a time when the Reserve Bank of India (RBI) is in loggerheads with the Centre over issues ranging from interest rate cuts to autonomy over its policy decisions, a former RBI official said although the government had upper hand over the RBI, it should maintain a relationship of trust and respect in the larger public interest.

“The government should look up RBI with pride for its contribution and should not treat the institution at par with any other department under its control,” said professor Indira Rajaraman, Member of Thirteenth Finance Commission and a former independent director of RBI.

Delivering the 34th Nani Palkhivala memorial lecture here on Saturday, Rajaraman said, although the relationship between the government and the RBI was not always amicable, the recent steps taken by the government has taken the hostility to a different level.

Speaking on ‘Decoding the RBI-GOI relationship’, Rajaraman said the two events that led to public display of outrage between the two parties is that the government invoking section 7 of the RBI act, which empowers it to consult and issue directives, and secondly the government questioning the very governance of the RBI instead of raising any particular policy issues.

Highlighting that the central board of the RBI has upper hand over the governor, Rajaraman said, clause 2 of Section 7 ‘unambiguously’ entrust the functioning of the RBI to central board.

“But we think the RBI governor as a representative of the body with unquestionable authority,” Rajaraman said and added that the governor has been built bit too much on public perception.

She also said that while voting by board members is permissible under the act, it should not make all RBI decisions a ‘number game’.

Delving into the statutory relationship between the Government and the RBI, Rajaraman said, that it is under government’s pleasure that the RBI exist so the government has the power to control the central bank.

“While government criticises the RBI’s monetary policy, the RBI should also be allowed to criticise government’s fiscal policy and there should be a mutuality here,” Rajaraman said.

On the Government’s demand for transferring dividends, the professor said, 92 per cent of dividends received from all public sector banks (PSBs) and financial institutions owned by the government comes through the RBI and it is the largest source of non-tax revenue for the government.

“So this makes the government fiscally dependent on the RBI and the Government will question every rupee spent by the RBI because it has denied its non-tax revenue,” Rajaraman said.

Enumerating various functions of the RBI, the former RBI official said, of all the functions ‘guardian of financial stability’ is the most important function as it saves the public from financial instability arising out of bankruptcy and the consequent domino effect or ‘financial contagion’.

On the functions of the RBI’s central board, Rajaraman said, the board meets at least six times a year and has various subcommittees to deal with various financial and policy matters.

“But I feel there is no adequate time for the board to fully review and discuss the reports of all subcommittees,” Rajaraman added.

The Palkhivala foundation, named after the popular Indian jurist Nani Palkhivala, conducts lectures on various topics of public interest, grants scholarships to poor and deserving students in educational institutions, particularly to those who are physically and mentally challenged. The foundation has so far conducted 33 lectures on a wide range of topics.

via “Govt should not treat RBI at par with other departments under its control” – The Hindu BusinessLine

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