Where spine and credibility matter

The surprise move that pulled out 86% of currency out of circulation does not have any precedence in the world. There was absolutely no template to follow and no experience to draw upon. Considering this, it is not surprising that economists disagreed on the efficacy of the objective and severity of the impact. However, there is a broad consensus that demonetisation has hurt the reputation of the Reserve Bank of India (RBI).

It is still not very clear who proposed the idea. Recently, RBI governor Urjit Patel told a parliamentary panel that work on demonetisation began in May 2016. Did former governor Raghuram Rajan refuse a second term because he did not support demonetisation?

The RBI had earlier said that the government advised it on November 7 to scrap high-value notes. The RBI Board cleared the move next day, hours before Prime Minister Narendra Modi’s televised address. This led to the growing perception that the RBI crumbled under government pressure. The vacant posts of independent directors in the RBI Board added to the perception.

A number of former RBI governors were anguished at the erosion of the central bank’s autonomy. Y V Reddy said that “institutional identity of the RBI has been damaged”. He said the Centre has every right to take the decision but if he were the governor, he would have simply expressed his professional disagreement over the feasibility of the move. Bimal Jalan said, “The autonomy of the RBI is a very fundamental fact and we have to maintain it”. In a recent op-ed, former deputy governor Usha Thorat wrote, “It is indeed a sad day to see one of the most respected public institutions in India becoming an object of ridicule and scorn”.

While the British were first setting up RBI, Sir Norman, the then governor of the Bank of England, commented, “It should be like a good ‘Hindoo’ wife, always tendering advice and obedient. The husband, the government, would be dominant and free to take the wifely advice or not”.

Source – https://www.deccanherald.com/content/592621/where-spine-credibility-matter.html