The 'conflict of interest' theory is as realistic as 'perfect competition' assumption is economics. Was not it Raju of Satyam who got most international awards in corporate governance ? Instead of attacking RBI using abstract principles, one need to get ground-real. The proof of pudding is in the performance of the RBI in terms of whatever functions you ve mentioned. It may be nobody's privilege to assert that it could not have been done better way, but nobody can blame that it has not done a job as good or better than other imp economic agents, as an economist would say, that the country deserves.
Good article Ajay,How do you realistically see more transparency being adopted at the RBI? Could the governor do this if he decided to at the next meeting? I'm guessing there's probably some long drawn out process for changing what data can be released and how the text can be shortened/changed.
Anonymous,Could RBI become more transparent? Yes. It would involve change, and I'm sure every bureaucracy dislikes change, but it's quite feasible.Every sensible central bank has raised standards of transparency in the last 25 years. As I say in the article, what's remarkable is that RBI transparency lags China, Bangladesh and Pakistan on two measures: the present level of transparency, and the change in transparency over the last decade.
RBI has considerable lack of transparency on its Branch expansion policy,I have tried to analyse the policy at: http://bagdu.blogspot.com/2009/07/rbis-branch-expansion-policy.htmlWith GoI having already bough SBI stake and slated to buy NHB and Nabard's stake by December, one would hope will lead to somewhat greater transparency. Is RBI a holy cow when it comes to critiquing monetary institutions?
Dear Ajay-Kindly note how successful your so called transparent central banks were in shielding their economies from the recent financial downturn as compared to RBI which is the force solely responsible for holding together India during the worst recession of our times.
Dear Anonymous,How about: "shielding their economies from the recent financial downturn" is not the function of central banks.
"Reserve money (or M0) is the sum of RBI's holdings of foreign exchange reserves and Indian government bonds. In a proper central bank, changes in M0 are the consequence of a fully articulated monetary policy strategy. At RBI, M0 bounces around owing to conflicts of interest. Sometimes, the pressure of deficit financing forces RBI to buy more government bonds, thus driving up M0. Sometimes, the pressure of currency pegging forces RBI to buy US dollars, thus driving up M0. This is surely not the right way. At the same time, however bad be the present way, it is important to articulate it fully, and release copious data with the blow-by-blow action. The market and the public and Parliament must have a keen understanding of the rules of engagement through which RBI buys or sells government bonds or dollars, and what it is doing every day. "My Comments: Only in a strict money targeting regime would changes in M0 be the consequence of a fully articulated monetary policy strategy. But that regime presumes a stable money demand function. World over, instability of the money demand function has driven central banks away from any form of monetary targeting. That is true for India as well. In a strict interest rate targeting regime, money will become endogenous. The central bank has to supply as much reserves as the economy demands at the targeted rate. Reserve money will bounce around a lot. 1. When you target quantity, price becomes endogenous.2. When you target price, quantity becomes endogenous.There is nothing right or wrong about it. India is somewhere in the middle of the transition from quantitative to price based monetary policy. "How about: "shielding their economies from the recent financial downturn" is not the function of central banks"My Comments: That is exactly what the Fed has done. In which book would the extraordinary expansion of the Fed's balancesheet qualify as normal central banking?
It is rather interesting for me to read the article. Thank you for it. I like such topics and everything that is connected to them. BTW, why don't you change design :).
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