Demystifying the Reserve Bank

An extract from Duvvuri Subbarao's book 'Who Moved My Interest Rate?'

Published 4 years ago on Nov 25, 2016 Read

In August 2009 when I was in London for a conference, an interviewer from Reuters asked me: ‘You’re soon going to complete one year as governor of the RBI. What goals have you set for yourself for your term?’ You’d guess, and rightly so, that I was unprepared for this. Any question beyond cutting the interest rate was clearly outside the syllabus, as our students would say, and I was quite flustered. As I thought on my feet, I blurted out something to the effect: ‘First, I’d like to position the RBI as a knowledge institution; second, I would want to make the RBI the best practice model among emerging-market central banks for expertise in making policies in globalizing world; and third, I want to demystify the Reserve Bank.’

The last bit of my reply was playing in my mind through the rest of the day. Why indeed had the need to demystify the Reserve Bank come to me at such a pressured moment? Sure enough, I was quizzed quite a bit in subsequent interviews about what I meant by demystifying the Reserve Bank which forced me to give a concrete structure to my unconscious thought process.

Demystification- a Priority

There were two reasons why demystifying the Reserve Bank seemed such a high priority. The first was my strong feeling that the Reserve Bank has to render accountability for the outcomes of its actions. The Reserve Bank has, in fact, embarked on a number of voluntary initiatives to render accountability. But these measures are all in the nature of ‘supplying’ accountability; of what use are they unless they are matched by ‘demand’ for accountability from the larger public? And how can the larger public demand accountability unless they have at least a basic understanding of the role and responsibilities of the Reserve Bank.

It struck me that the large majority of people, even educated people, do not know very much about what the Reserve Bank dose. Many know it prints currency but beyond that, the Reserve Bank is a black box, a mysterious institution, a sort of monolith, doing obscure things that have no real relevance for the everyday lives of people.

The reality is, in fact, very different. The Reserve Bank prints and distributes currency, of course, but it does a lot of other things besides. It is the monetary authority of the country, which means its main job is to keep inflation under control while also supporting growth. It is the gatekeeper of the external sector which entails monitoring and regulating capital inflows and outflows, and keeping the exchange rate steady. It regulates and supervises banks to ensure that the money which people save in banks is safe and is productively deployed towards generating economic activity; similarly, it regulates non-banking financial companies and segments of financial markets, again with the aim of channeling savings into productive investment. The Reserve Bank’s regulation extends also to the payment and settlement systems with the objective of making financial transactions safe, robust and efficient. The Reserve Bank is the central bank-that is, it is the bank of banks, and the bank for of all this, and importantly, the Reserve Bank has a key role in the economic development of the country and drives an impressive social development agenda.

That, in a nutshell, is the range and diversity of responsibilities of the Reserve Bank. And what it does affects the everyday lives of people across the country-from the prices they pay in the market, the interest they earn on their bank deposits, the interest they pay when they borrow from a bank, like, say the size of the EMI (equated monthly installment)they pay on a house loan. It affects how much foreign exchange they can take out to spend or invest outside the country, say, for medical treatment or to educate a child abroad, and how the government pays for new roads, schools and hospitals.

My view was that if the Reserve Bank had to be held to account, we needed to demystify the institution so that the larger public understood what it did and how that connected to their lives.

There was another equally important motivation for my wanting to demystify the Reserve Bank. Not only do people not know what the Reserve Bank does, but they also have negative perceptions of the institution. A widely held stereotypical view of the Reserve Bank is of a rigid, wooden-headed monolith, making rules and regulations with little understanding of the realities of India.