Who Is Undermining The RBI Now?

This morning, my good friend Harikiran shared this story in ‘Indian Express’ with me. It made me angry. Once again, sections of the media are whipping a story to death, to the point of maximum revulsion and well past its point of usefulness or effectiveness. More than RBI’s acquiescence, it is these criticisms that would now diminish RBI globally.

There is nothing wrong in RBI’s acquiescence and that is the way it is in many countries and in India historically too. Ask TCA Srinivasa Raghavan, a well regarded scholar who has extensively chronicled the institutional history of RBI.

Frankly, what do the critics have to throw at RBI? The rupee is stable. Inflation rate is coming down. Interest rates are coming down. The foreign exchange reserves are adequate. Who knows what the economic growth rate is? In any case, is that RBI’s baby? So, where is the concrete mud to throw at RBI?

It is the so-called execution of delivering notes that has elicited these reactions – if banks colluded with the rich to send out notes through the back door as Srivatsa put it his article – can the RBI Governor act as the watchman at every branch?

Who created the PSU structure of Indian banking and preserved it over last the five decades? RBI? Nonsense.

RBI could not stop monetisation of fiscal deficits in the 2011-2013 period, (that is, it could not prevent fiscal dominance in that period), RBI could not do anything about the farm loan waiver of UPA government in 2007, about the loan melas of Janardhan Poojary and so on.

I have not and will not hold these against the RBI and the persons who presided over the RBI in these instances. It is in the very nature of the institutional relationship between RBI and the government.

So, up to a point, this debate on RBI autonomy and its rights was welcome and necessary. But, the equilibrium point has been crossed. Now, it has become yet another brainless flogging of a topic to the point of disgust and revulsion.

Who is Standard and Poor’s, anyway? The agency that downgraded American debt but did nothing to China’s credit rating all these years? It has just reduced the outlook on China rating fro stable to negative. A pinch on the wrist. Not even a slap. Nothing more.

This is the rating history of S&P on China:

S&P: Assigned initial rating in 1988 and seven (7) subsequent upgrades, five (5) of which occurred post-June 2001:
Assigned “Satisfactory” rating classification (July 1988)
From “Satisfactory” to “BBB” (February 1992)
From “BBB” to “BBB+” (May 1997)
Reclassified from “BBB+” to “BBB” (July 1999)
From “BBB” (affirmed in 2001) to “BBB+” (February 2004)
From “BBB+” to “A-” (July 2005)
From “A-” to “A” (July 2006)
From “A” to “A+” (July 2008)
From “A+” to “AA-” (December 2010) [Link]

Yes, upgraded in 2010, after one of the biggest credit stimulus in history in response to a North Atlantic financial crisis! Not yet downgraded. It is a public secret as to what China’s true gross fiscal deficit and debt levels are.

We all know about their (credit rating agencies) craven behaviour in the run up to the financial crisis of 2008.

Does it really matter what they think of RBI? They do not have the credibility to comment on someone else’s credibility. Not anymore.

The article in ‘Indian Express’ cites Dr. Arun Shourie too. With all due respects to him (and confidence that I have, in my judgement), I cannot disagree more.

This is what the article cites him as saying:

“In its craven note (to the parliamentary panel), the RBI has slavishly reproduced some of the arguments trotted out by the government — like terror threats and black money (as justification for demonetisation). The Governor caved in and has turned out to be an under secretary in the Ministry of Finance,” he says, adding that the Governor’s job is to provide independent counsel to the government. “It is clear that he didn’t do it and didn’t stand up and thus, forfeited his responsibility.”

I have argued in April 2016 that the government should allow certain institutions and their heads to play the natural counterbalancing role to the short-term pulls and pressures of democracy and politics that it is subjected to. But, then the onus is on the government. But, as things stand, the current structure does not leave RBI with other options.

Just as Raghuram Rajan’s (even) innocuous remarks were played up by the media to set him up as an adversary of the government (a narrative that the Government foolishly bought into, for various reasons), the danger that the former RBI Governors and Deputy Governors must take note of is that their well-meaning criticisms arising out of their love, passion and concern for the reputation of their alma mater is being exploited by other players for other goals. Indeed, far from helping the institution that they love, they will be undermining it with their public and media interventions.

So, to reiterate, it is not my point that they should not have aired what they did. That was welcome and even necessary. But, they need to remember when the point of diminishing marginal utility of their public utterances sets in. With media jumping at their remarks with glee as one more opportunity to embarrass this government, they should now realise that that point had arrived and has been crossed.

Indeed, more than what RBI did (or, did not do) in the last two months, these disproportionate criticisms would begin to undermine the metrics with which the central bank should be judged – currency stability and financial stability. Beware of the dictum of the road to hell being paved with good intentions and beware the law of unintended consequences.

This post was first published at The Gold Standard and has been republished here with permission.