This refers to your edit “Rubber-stamp Rajan” (FE, July 27). You have lamented the dilution of the role of the Reserve Bank of India (RBI) in the formulation of monetary policy. The edit concluded stating that RBI was one of the few institutions whose credibility has not been so far tarnished. However, I would like to point out that the central bank lost its credibility during the period when Indira Gandhi was the prime minister. Gandhi nationalised 14 banks in July 1969 and again 6 banks in April 1980 without consulting RBI. That was done for achieving political objective of using banks for getting the vote bank (remember loan melas that followed after sometime) on the side of Congress. Again, on the eve of the general elections in 2008, the government waived farm loans amounting to about R70,000 crore. All the public sector banks (PSBs) got affected due to these write-offs and incurred heavy losses but never objected. Some of it even contributed to the banks’ non-performing assets (NPA) problem. But RBI adopted a mute approach to the issue. More than losses, the government destroyed the credit culture of farmers. Even with regard to the farm loan write-offs, RBI was not consulted. The government under the UPA regime had manoeuvered top level appointments in PSBs. The finance ministry’s interference during UPA regime with regard to the directives on earmarking targets for retail banking loans is known to everybody. This is how the government at the Centre has been treating a supposedly autonomous institution. Now, as for the monetary policy, former finance minister P Chidambaram had a clever strategy to showcase the independence of the Reserve Bank to the public. Prior to the announcement by RBI of rate changes, Chidambaram used to air his views on what the contours of the policy announcement could be. When RBI either did the opposite or took a decision quite different from this viewpoint, the then finance minister used to say that since RBI is an independent organisation, the government cannot interfere in such issues. The market and the public (including monetary policy experts) paid complements to the government for respecting the independence. But the then finance minister had the last laugh since he purposely sought defeat in such trivial issues like monetary policy but interfered in all important matters.
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