RBI at 90: India's central bank must do better on supervisory front to not sully its track record
Post 1991 reforms, stifling micro-regulation and directed credit gave way to allowing banks more freedom, deregulating interest rates, allowing greater, though limited, freedom in the forex market, issuing licences to private banks, and, more recently, presiding over the digitisation of financial transactions and entry of fintechs.
From the time when it was derisively referred to as no more than a section of the finance ministry-BK Nehru, India's ambassador to the US in the 1960s, reportedly turned down the post of RBI governor, saying the bank lacked independence — to more recent times, when sitting and former finance secretaries to GOI vie for the job, RBI has come a long way.
Its governors are known to have stood up not just to finmin bureaucrats, but also to FMs. 'We [RBI] are the gatekeepers, and sometimes have to say no', said former governor Raghuram Rajan. That willingness to say 'no', to mark time on capital account convertibility, for instance, saved the country from the worst excesses of the East Asian crisis.
However, there have been occasions when RBI either did not say 'no' or failed to do it forcefully enough, as during demonetisation in 2016. True, the bank does not have unfettered freedom. Under the Act, 'The Central Government may from time to time give such directions to the Bank as it may, after consultation with the Governor of the Bank, consider necessary in the public interest.'
That can be a dampener to a bank that does not enjoy statutory independence. However, smart governors have
