'RBI should earn autonomy'

AT NO time in the history of the Reserve Bank of India (RBI) was there so much public articulation of monetary and financial policies by policy-makers, as in the years following the introduction of reforms in July 1991. While economic reforms proved a fertile field for public articulation, the more important reason seems to be the attitudinal change on the part of the top executives of RBI to go public on various policy matters.

The RBI has travelled very far from the days of C.D. Deshmukh and Rama Rao, reticent central bankers, to the days of Dr. Rangarajan, a typical university professor voluble, scholarly and expansive. In between we had a flamboyant H.V.R. Iyengar who would accept any invitation to speak; P. C. Bhattacharya and Jagannathan who were less inclined to make speeches; L. K. Jha, I. G. Patel, Manmohan Singh and Malhotra were selective in the matter of public speaking, on monetary policies.

The introduction of economic reforms in July 1991, which marked a clear break from the past economic policies, required all the public support and efforts were made to create conviction in the mind of the public of the need for reforms. The RBI took on the role of a public campaigner in respect of its own monetary and financial policies and the medium chosen was public articulation as frequently as possible by the top brass concerned with policy- making.

The ball was set rolling by Dr. Rangarajan after he became Governor of RBI in 1992 and in this campaign he was ably assisted by two Deputy Governors first by Mr. S. S. Tarapore and later by Dr. Y. V. Reddy. These three together made as many as 89 speeches - 27 by Dr. Rangarajan (1992-97), 39 by Mr. Tarapore (1992-96) and 23 by Dr. Reddy (since September 1996).

These selected speeches represent theoretical and empirical analyses of India's monetary and financial policies and are now available in the form of three books. Mr. Tarapore's book is the theme of this review.

The speeches of Mr. Tarapore are grouped under distinct heads - Monetary Policy and Macro-economic Management, Financial Sector Reforms; Internal Debt Management and Exchange Rate Management. This is broadly similar to the grouping of the speeches of the other two RBI officials. Though the ground traversed under each of the groups by the three officials is common, yet each had a distinct way of looking at the subject. Mr. Tarapore's speeches are discussed here with reference to this aspect.

First, Mr. Tarapore focuses specially on the RBI as the central bank with a specific task. In the speeches of Dr. Rangarajan and Dr. Reddy, the role of RBI is subsumed in their discussion of monetary policy per se. In contrast, Mr. Tarapore looks upon RBI as the focal point of monetary management. Given the objective of price stability and the need to control inflation through monetary regulation, the identity of RBI clearly emerges from Mr. Tarapore's speeches, in designing, implementing and managing monetary policy. Strict adherence to inflation control in the face of political pressures and public criticism, reflects RBI's individuality. Mr. Tarapore builds up this image by going into such issues of central banking in India as autonomy, credibility of the central bank, tasks of the central bank of beyond tomorrow, its role in the context of integration of the domestic financial sector with the world financial system. Ultimately, according to Mr. Tarapore, the track record of RBI with reference to the objective should be such as to earn autonomy instead of being given.

A second noteworthy aspect is Mr. Tarapore's case for giving sufficient attention to the ratio of net foreign assets to currency (NFA/ currency ratio) in the conduct of monetary policy, especially in the context of capital inflows. A rising NDA/ currency ratio would not only create a cushion to meet capital outflows but also contain the expansion of domestic assets (NDA) and thus contribute to the reduction in overall borrowing by government.

In a sense, the concept of NFA is not new as it is the obverse of NDA, which figured so prominently in IMF consultations with India during the 1960s. It also amounts to reverting to the pre-1956 position when the legal requirement was that foreign assets should bear a specific proportion to the currency issued (currency banking). But what is new in Mr. Tarapore's suggestion is that NFA/ currency ratio would be half-way house between the freedom of the central bank to issue currency and the rigid currency board system - a mechanism resorted to by a few Asian and Latin American countries in response to the currency crisis experienced by them.

In contrast to Dr. Rangarajan and to some extent Dr. Reddy, Mr. Tarapore has dealt with, in a number of speeches, the issue of internal debt management in its various aspects. He looks at this problem from the view-point of monetary management and the development of indirect instruments of monetary control such as open market operations. He makes out a strong case for the development of a retail market for government securities and suggests the setting up of many primary dealers and a large number of satellite dealers to achieve this.

In his opinion, an important component of internal debt management is the creation of a consolidated sinking fund which would break the vicious circle of borrowing fresh only for repaying debt. Mr. Tarapore is aware of the difficulties in funding this arrangement but emphasises the need for taking the first steps to deal with the problem over the medium term. In all the seven speeches on the subject, Mr. Tarapore makes out a convincing case for an active internal debt management policy.

Surprisingly, Dr. Rangarajan, Mr. Tarapore and Dr. Reddy made only a limited number of speeches on external sector issues - balance of payments, capital flows, exchange rate management and reserves management. The subject being technical, these speeches were made at specialised forums. Three points emerge from Mr. Tarapore's speeches on the subject. First, foreign exchange reserves should not be viewed in terms of adequacy to cover imports and other liabilities. The level of reserves should be seen as a confidence - enhancing signal to the world that India's foreign liquidity is sufficient to cope with sudden pressures. Second, Mr. Tarapore is of the view that reserves management could be to minimise losses rather than maximise returns. Third, he takes the conservative view that gold is important as a foreign exchange asset - typical of Indian preference for the precious metal but contrary to the views of progressive central bankers abroad and the IMF.

The theme of financial reforms covered by the three speakers is not referred to here, as all of them deal with much the same issues and concerns.

Taken together, all the speeches of Mr. Tarapore, though made in the general context of on-going financial reforms, are more in response to the criticisms of policies pursued at the time.

It will be useful to bring together the views of each of the speakers on the same subject and arrive at a consistent account of policy- making in the RBI. This is a task for a student of research in Indian monetary policy.

T. K. Velayudham

Send this article to Friends by E-Mail

Section  : Business
Previous : Marketing and selling of insurance products
Next     : Crisil upgrades Vashisti Detergents' NCD rating