RBI is one of the very few major institutions that, post-reforms, remains unreformed. It has a large number of functions, many of them conflicting, a huge establishment and a mostly change-resistant cadre that is recruited early and immersed in the RBI way. The central bank’s current governor, D Subbarao, came to the job with excellent credentials and raised the hope that this crucial institution will see some changes. RBI, notwithstanding the fine job it did immediately after the global financial
crisis broke, shows no signs of changing its spots several months after Subbarao’s tenure began. But the question still remains whether some of the central bank’s most orthodox positions have the enthusiastic imprimatur of Subbarao or whether they are more a product of an institutional legacy that may yet be questioned. This is particularly relevant when considering RBI’s on-record opposition now, as reported by FE, to an independent debt management office. The DMO was one of those logical, technical reforms that were expected to have an easy passage. All the intellectual work behind a DMO is complete. RBI had earlier supported the idea. The appropriate legislation had to be approved by the Cabinet and passed by Parliament. But RBI’s volte face and on-record opposition makes this process difficult. Legislative and even executive view on a DMO will have to ultimately disagree with RBI’s view if the law has to pass. That’s not something anyone should bet on. The only way there can be hope for a DMO any time soon is an internal RBI rethink on the issue; the rethink starting at the top.
That rethink should start by questioning the core of RBI’s opposition to a DMO now: that the huge level of government borrowing means RBI should remain the government’s investment banker. Unless RBI is the debt manager, goes the argument, banks can’t be convinced to hold so much government paper. A DMO won’t have the authority. This argument presupposes that the government’s new debt manager will be so unimpressive vis-a-vis RBI that potential bond buyers will just walk away. But why would a DMO be unimpressive, if set up the right way? The real issue, one that RBI won’t answer, is that the central bank both manages debt as well as sets the short-term interest rate. As debt manager, it would always want low rates. But as inflation and economy watcher, RBI may want low or high rates. RBI is also the bank regulator and banks hold large quantities of government paper—this is also a conflict. But it is a conflict RBI is turning into a virtue in its current argument! RBI perhaps wants to protect its vast empire. But RBI, formerly Imperial Bank of India, should look at the history of imperial ambitions that have ignored reason.