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Reforms for the apex bank

P. Devarajan

FOREX, securities and the equity markets are up to their old tricks and none has a clue to the widespread gloom. The rupee is back to its habit of bowing to the dollar and securities have lost a sizable 25 to 30 paise in a single day.

``It will be turmoil through the year as long as international crude prices and defence payments continue to be skittish. Combined with a non-performing Vajpayee Government, there will be no peace for the money managers at RBI Towers,'' feels a primary d ealer. He should know, having got badly scalded in the last six months.

``Six months of the current fiscal are through and there are no signs of growth,'' contends another.

This is an opportune moment to run through the report of the Advisory Group under Mr Narasimham. ``... the Advisory Group recommends that the efficiency of the forex market would be greatly enhanced if, without in any way compromising the freedom of acti on on exchange rate policy, the RBI were to reveal on a regular basis, separately, its direct and indirect intervention operations,'' the Group says.

The Group is silent on the frequency of publishing information. It may be best for the RBI to announce, at the end of the day's trading, all the details on intervention. It could be on the lines of LAF. RBI hits the market directly and goes through, obli ging nationalised banks to play the forex markets.

Information asymmetry in the forex and securities markets is quite rampant, with RBI having all of it. Yet, it is getting harder for RBI to do anything sensible if New Delhi refuses to tango.

And here the report of the Advisory Group comes in handy when it argues for RBI autonomy. But it may not happen -- even if Parliament okays the idea - as long as the private sector holds all the stake in RBI. The Group does not dwell on the subject.

There are many who think it may not help. A privately-owned RBI, independent of the Finance Ministry, is a must for the conduct of the Indian economy. New Delhi has run the show for too long, and performed badly.

RBI was a private-owned entity long ago and Dr. C. D. Deshmukh in a March 20, 1948, address at the Gokhale Institute of Economics and Politics, refers to this aspect: ``The Government has recently announced its intention to nationalise the RBI. Although the board of the bank sincerely believes that this decision is premature and not logically necessary in view of the stage of economic development reached by the country, they will, in the event of the decision proving to be irrevocable, co-operate with G overnment in evolving a scheme of nationalisation that is calculated to ensure, with a reasonable prospect of success, the same degree of advice and assistance to Government that the present type of constitution offers. After all, it is not the theoretic al constitution of the institution that matters, but the spirit in which the partnership between the Ministry of Finance and the bank is worked. The success of the partnership will, in the ultimate analysis, depend on the manner in which Government desir es to be served and provides opportunities accordingly. No country can have better public institutions than it deserves.''

If the Government does not want corporates to hold equity in RBI, it could be spelt out and the holding broad-based. Then, the huge profits made by the RBI could be used to help the financial system rather than bridge the fiscal deficit.