Sucheta Dalal

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August 25, 2010

RBI needs to be more transparent in its decision making. Publishing its policy discussions, will ensure that RBI policy-makers are allowed to have different views irrespective of the final policy decision

On 5th August, Moneylife ( wrote that Dr KC Chakrabarty, deputy governor, Reserve Bank of India (RBI), may have been the victim of a deliberate set-up, leading to the public humiliation of having his key portfolios drastically cut. His crime: he allegedly expressed an off-the-record view that the monetary policy should have been more aggressive in hiking interest rates and hinted that the finance ministry really dictated decisions. The statement rocked the bond market and led to a vitriolic report by a news wire, which was picked up by the media, triggering RBI’s action. We find that other RBI governors have got away with worse, without attracting such humiliation.

For instance, if Dr Chakrabarty is to be dubbed a ‘loose cannon’, why forget Dr YV Reddy’s tumultuous tenure? He is correctly applauded for saving India from a financial crisis, but he probably wouldn’t even have become the RBI governor if he were dealt with as firmly as Dr Chakrabarty has been. In August 1997, as deputy governor RBI, Dr Reddy created a huge storm in the currency market when he told forex dealers at a Goa conference that the rupee was overvalued. Nobody demanded that he be gagged or have his powers curtailed. In fact, he went on to become RBI governor, despite an uneasy relationship with one of his bosses. 

In January 2005, as the RBI governor, he caused another panic when he sent markets into a downward spiral by saying that foreign institutional investment (FII) must be capped. The then finance minister made a statement to cool the market down and the governor had to issue a hasty retraction. Let us also not forget that Global Trust Bank was treated with kid gloves by the RBI under YV Reddy, leading to its ultimate collapse in 2004. The Bank was given a clean chit in 2002.

In 1997, RBI governor Dr C Rangarajan divested the then deputy governor SP Talwar of his key portfolios, which were later restored during governor Dr Bimal Jalan's tenure. But it was a quiet move, not the public humiliation that Dr Chakrabarty was subjected to. Dr Rangarajan was apparently incensed about Mr Talwar’s decision to grant the provisional banking licence to the dubious CRB group which went bust. Clearly, the only way to resolve all this is to bring more transparency to RBI's decision making, by publishing its policy discussions with a time lag. It will ensure that policy-makers are allowed to have divergent views without fear and irrespective of the final policy decision —
Sucheta Dalal

-- Sucheta Dalal