Bringing change to large monolithic organisations is never an easy task, something Duvvurri Subbarao will discover when he takes over the reins at RBI later this week. Still, the governor-designate could not hope for a better set of enabling circumstances to force a change. Things haven?t been at their best for RBI over the past few months, with much criticism of its handling of the inflationary economy. Change is easier in a time of crisis?think back to 1991. Subbarao also comes unburdened by any past association with RBI, unlike his predecessor who had spent a stint as deputy governor before taking the top job. There is little doubt, as already argued in these columns, that his first task will be managing inflation. But while doing so, the new governor must not miss the wood for the trees. The window of opportunity to push change may shut quickly, especially if inflation comes under control?inertia may replace urgency at such a time.
There is a fundamental need to streamline the functioning of RBI. It must become more like modern central banks, focused on inflation with an eye on growth. It should divest itself of other functions like managing government debt and supervising banks. There is, of course, a deep conflict of interest in RBI managing all these functions in one go. Selling government bonds to banks, which RBI allegedly supervises is one of the major conflicts. The government announced a proposal to set up an independent debt management office in the Budget of 2007?Subbarao must back this to fruition. He must also work with the government to create a new financial regulator to oversee the functioning of banks. There are plenty of regulatory bodies already in place in India?including Irda and Sebi, and the task is not difficult. It is, however, always difficult to slim existing bureaucracies because size is associated with more resources and more power, and the insiders at RBI will resist. The new governor will hopefully realise that RBI?s credibility and power in the future will be determined more by its handling of monetary policy and economic growth than by the number of areas it supervises. The bureaucracy can be placated by shifting some of them to the newer turfs of the proposed debt management office and financial regulator. The clock of change is already ticking.