RBI punishes KC Chakrabarty, but move raises critical issues

RBI’s decision to strip Dr KC Chakrabarty of many important portfolios raises broader issues about transparency in the central bank’s functioning

The Reserve Bank of India's (RBI) decision to strip deputy governor Dr KC Chakrabarty of many of his powers on 3rd August has caused a flutter in the banking and financial world. While there are plenty of those who correctly argue that the outspoken Dr Chakrabarty had no business expressing a view different from the official line so soon after the monetary policy (he said that the central bank would have no option but to raise its key policy rates more to control runaway inflation), it has also raised issues about the central bank's independence and whether contrary views are permitted within the central bank.
 
On 3rd August, the RBI stunned bankers by stripping Dr Chakrabarty of important portfolios such as urban and rural cooperative banks, administration, personnel management, Right to Information and Payment & Settlement Systems.

We learn that Dr Chakrabarty has been very vocal about his views within the bank and even had a spat of sorts with some bank chiefs in a meeting prior to the announcement of the credit policy. Bankers tell us that the RBI itself was keen to raise rates more aggressively, but softened its decision after a meeting with the finance ministry.
 
These bankers say that while the RBI governor may have publicly protested the finance ministry's move to encroach on its autonomy with regard to settling jurisdiction issues, it is a fact that the governor takes cues, if not instructions, from the finance minister before deciding interest rate changes. This time too, there are rumours that the RBI softened its stand after a meeting at Delhi.
 
Interestingly, while governor D Subbarao may have stripped Dr Chakrabarty of key portfolios, he personally was a hot topic of discussion on the banking grapevine. Having taken a stand against the finance ministry's views on the Security & Insurance Laws (Amendment and Validation) Bill 2010 on regulatory jurisdiction, there were rumours that Dr Subbarao would step down. However, the Bill has been passed without any such move on his part.
 
Interestingly, while Dr Chakrabarty's outburst was an anomaly, he has plenty of sympathisers who are raising issues that are bound to haunt the RBI in the coming days. For instance, many question whether the RBI allows any dissent in the discussion process. They also want some transparency and accountability in its decision-making process. For instance, it is pointed out that barring the European Central Bank, most leading central banks publish monetary policy discussions in the public domain after a lag of six to eight weeks. It is these discussions that reveal to the world whether a specific central banker is a policy hawk or a dove. More importantly, they are forced to be accountable for their views and argue them out.

Without any transparency whatsoever, in any aspect of RBI's functioning, there is no way for people to know the process of arriving at policy decisions. For instance, is monetary policy dictated by a powerful governor or the result of a frank and open discussion? Does the RBI then stick to its decisions or is it influenced by the finance ministry to modify its stand?

If governor Dr Subbarao is really keen on preserving RBI's autonomy, voluntary disclosure and more transparency will be an important step. If the RBI decides to release its discussions with a lag, it will be the best way of guarding against interference and influence by the finance ministry.

By the way, if the RBI does this, it must take care not to go the way of the Securities and Exchange Board of India. The capital market regulator took the bold decision to put its board agenda and the minutes of its decisions in the public domain. But the manner in which it functions and what is reported to the public has done nothing to enhance confidence in its functioning.

Comments
Mahesh Khanna
1 decade ago
Expecting the details of the nasty intruge into the ivory tower,which could have stripped the important portfolios of Dr. K.C. Chakrabarty'.
Sara Najmi
1 decade ago
The RBI Act though amended many a time has not seen any change to ensure its autonomy&indepedece in relation to Monetary Policy . No wonder that RBI Governor behaves like an extended Arm of FM. Monetary Policy should under the Act be put in the Exclusive Domain of the Central Bank. Till this happens it is not possible to expect the Centrl bank to do what it must keep doing.
Mahesh khanna
1 decade ago
A clean honest man would have to meet such a fate some day or the other but it has come too early.
MAK
1 decade ago
PRICES OF ESSENTAIL COMMODITIES MUST COME DOWN.

PLEASE CONTROL INFLATION.

POOR AND HONEST PEOPLE ARE SUFFERING A LOT.

MILLIONS OF RETIRED BANKERS AND OTHER PEOPLE HAVE NO PENSION OR ANY OTHER INCOME, HOW WILL THEY SURVIVE?

AUTHORITIES MUST COME OUT WITH SOLUTIONS FOR ALL THESE IMMEDIATELY.



P K Biswas
1 decade ago
Looking forward to more details from Sucheta Dalal, who was instrumental in exposing the scam in 1992. RBI and Finance Ministry have always packed the top positions by choosing sycophants and yes men/women.
B Rajaram
1 decade ago
We love staid bankers who look solid. Central Bankers had maintained an image of mystery and a dignity of the office which I believe , are essential in the otherwise , one minute a news story world with attention span of no more than a few minutes. Practical reality of interaction with Government and working together cannot be overlooked. No one but the TV channels and TRP business benefit from open spats at higher rungs in the name of transparency. The dignity of the institution too will degenerate as it is happening with the Parliament after TV coverage. We are still puerile and not mature enough.
K VITTAL SHETTY
1 decade ago
After the departure of Dr.Y.V.Reddy, RBI has become another department of the Finance Ministry seeking and obeying instructions and abdicated its responsibility of safeguarding the interest of the depositors.Dr.Reddy was not given extension for the sole reason of his independent stand and his understanding of the future and taking preventing actions well in time to save the economy.The present governor has no clue of what is coming and that is why in at many occasions he was pleading his ignorance of what is going to happen.Since liberalization we have never had such a pliant RBI Governor and the present inflation is mainly due to the faulty actions of the present Governor.
Unless RBI takes an independent view and take drastic action without pressure by interested industrial lobbies we will face the same problem that has resulted in the global financial meltdown.
I also like to recall the comment made by an Nobel laureate that Had US got a Governor like Dr.Reddy they would not have faced the sub-prime crisis.
Ch kalyanachakravarthy
1 decade ago
i wish to know what is the exact order issued on Dr Chakraborthy, will RBI release that to the public ??. Is the monetory or credit policy by RBI is such hush hush affair ???
p.v.maiya
1 decade ago
A very indelicate move by the RBI.
It would be advisable to publish the internal discussions after a time lag of 6 weeks. FRB of USA follows this - a procedure which was adopted more than a decade ago.
Dy governors are perceived by the public as representatives of the RBI and not as heads of any particular dept within the organisation. While a dy Governor may not generally stray into areas not of his direct responsibility, it should not be a water tight division of responsibility. Some broad working arrangement among the Dy Governors can be laid down.
R Balakrishnan
1 decade ago
RBI has DG's and ED's. Surely, one of the levels is superfluous. And, of late the RBI seems to be clearly functioning like a subsidiary of North Block. RBI has a bloated self opinion and worldwide Central Banks have failed again and again. They do not even what is inflation.
Glad that Mr KC is outspoken. We need more like him and not wimps who are ED/DG's.
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