Wednesday, July 28, 2010

And about time too…

It seems the advisability of RBI’s dual role is being questioned again. In a very well written and eloquent column, Mr. A. K Bhattacharya details the reasons.

There is one reason which is missed out, though. And that is accountability. Over  the years, the RBI has proven itself to be an excellent bank regulator. However, it’s conduct of monetary policy has been, well, disastrous. As a result, the RBI has always been able to hide its monetary policy failures behind regulatory successes. The crises India has avoided in 1997 and 2008 have been regulatory victories more than anything else. A pragmatic regulatory environment did not allow banks to take unseemly risks, which protected both the financial & real economy when the bubble burst. But the conduct of monetary policy when these events are underway was bumbling at best. I have written about the 2008 episode here. It is also true that there have been periods of excellence. Dr. Jalan’s tenure was one such period and by all indications, Dr. Subbarao’s tenure promises to be another. But these have been the exception rather than the rule.

As the independent conduct of monetary policy assumes greater importance, it cannot be conducted in the shadow of another activity, whether its banking regulation or government debt management.

If there ever was a time to break up the RBI, it is now.

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