MUMBAI: 2016 will be remembered as the year that saw bad loans at public sector banks scale new peaks as former Reserve Bank of India (RBI) governor Raghuram Rajan’s push to clean up lenders’ balance sheets resulted in PSU banks posting record losses in the fourth quarter of 2015-16.
The year also saw the former chief economist of the International Monetary Fund (IMF) opt out of a possible second term at the central bank’s helm and pass on the baton to one of his then deputies Urjit Patel.
Still, Dr. Rajan had laid the foundation for yet another milestone reform. Following the Centre’s decision to implement the recommendations of the committee headed by Dr. Patel, the RBI for the first time in its history, switched to a rule-based approach to monetary policy formulation with an explicit target set for inflation.
So in October, a newly constituted six-member monetary policy committee (MPC) decided the policy outcome at the RBI’s fourth bimonthly statement for 2016-17, cutting the benchmark interest rate by 25 basis points at its maiden sitting.
While the RBI Governor is the Chairman of the committee and has the casting vote in case of a tie, the governor does not enjoy a veto power. Apart from the governor and deputy governor in-charge of monetary policy, a third committee member is recommended by the central bank’s board. The other three members of the MPC are from outside the central bank and are appointed for a four-year, non-renewable term.
“Introduction of inflation targeting framework and a MPC-based approach, have increased the accountability and transparency of monetary policy making,” said Rupa Rege Nitsure, group chief economist, L&T Finance Holdings, who was a member of the Patel committee.
“It not just helps RBI stay focused on a specific inflation target but the final policy decision is an outcome of the consultative discussions covering several views and experiences. It ensures balanced representation of various sections of society and is hence more democratic in essence. The publication of the minutes informs general public about the actual thought processes supporting the decision. This helps create a good feedback mechanism,” Ms. Nitsure wrote in e-mailed comments to The Hindu.
The spotlight was back on the central bank by the end of the year following Prime Minister Narendra Modi’s November 8 announcement on the decision to withdraw legal tender status of the old series of ₹500 and ₹1,000 banknotes, which constituted 86 per cent of the currency value in circulation at the time.
Piyush Goyal, a minister in the BJP-led NDA government had informed members of the upper house (Rajya Sabha) that the demonetisation decision was taken by the central bank at its board meeting, prior to the Prime Minister’s announcement.
Central bank sources indicated that a board meeting was convened on November 8 — for which no agenda was circulated — just hours before Mr. Modi announced the decision to the nation.
While the RBI has not made public the deliberations of the November 8 board meeting, former Finance P. Chidambaram had questioned the sequence of events, suggesting that the short time intervals between the RBI board decision, the Union Cabinet’s meeting and the Prime Minister’s announcement seemed to indicate that the move was well orchestrated. Mr. Chidambaram is reported to have demanded that the central bank ought to share the minutes of the board meeting and let the public know who were the directors who attended it.
The RBI board’s decision, observers said, brought the issue of the central bank’s autonomy and independence back in focus.
“By statute, RBI is supposed to have autonomy,” Anil Kakodkar, a former chairman of the Atomic Energy Commision who was a member of the RBI board till 2015, told The Hindu. “There are certain policies for which the RBI is responsible and there are certain things, which are done in tandem with the government. So, there is specified composition of the RBI board which allows RBI to do that function.”
“Autonomy has been provided in the statute. It is for the board to remain conscious of it and act as per the objectives and functions of RBI,” Mr. Kakodkar said.
Indira Rajaraman, an economist and another former RBI board member, pointed out that the board has been operating at less than full strength.
“The central board of RBI is not operating at full strength. Four vacancies for external directors are yet to be filled. This is a serious matter since, by the RBI Act, recommendations regarding currency issuance and currency recall have to emanate from the Central Board. Since the three external members of the MPC have received all necessary clearances, they could immediately be inducted into the Board.” Ms. Rajaraman said.
The large number of vacancies, rather than the central bank’s board not being at full strength, was a concern, according to Mr. Kakodkar.
“Board composition is dynamic because terms of members expire at different points in time. So, it is rare that the entire board is full at any point in time. But there should not be a case when there are a large number of vacancies,” he said.
