Never waste a good crisis

The situation created by Urjit Patel’s resignation should be used to push through much-needed reforms

Among the quintessential traits of a central banker is to be unpredictable in action so that the markets can be kept guessing. Urjit Patel exhibited this quality in ample measure when he announced his decision to walk out of his job as Governor of the Reserve Bank of India (RBI) on Monday. His resignation caught everyone by surprise, including the markets which had been lulled into believing that the spat between the central bank and the Centre had been amicably resolved. The rumours of him resigning, which were doing the rounds before the last meeting of the RBI central board three weeks ago, had died down. He had chaired the Monetary Policy Committee meeting just last week and also a meeting of the Board for Financial Supervision that discussed the issue of Prompt and Corrective Action on some banks. The damage is now done, but what’s the road ahead? The crisis points to several reforms that are needed in the RBI and changes in its equation with the Centre. As former RBI Governor Raghuram Rajan points out in his book, we need a clearer enunciation of the central bank’s responsibilities. The position of the RBI Governor in the government hierarchy is not defined clearly. “There is a danger in keeping the position ill-defined because the constant effort of the bureaucracy is to whittle down its power,” argues Dr. Rajan. Not just this, the personal element in decision-making in the RBI has to be taken out and replaced by an institutional mechanism, much like the MPC did in the case of monetary policy. The reference of the reserves sharing issue to a committee is one such idea where there will be little scope for the Governor to act on his own just as the government too cannot exert pressure on him. Never waste a good crisis, said Rahm Emanuel, former White House Chief of Staff. After having created the crisis, the least that the Centre can now do is to use it to reform the system.
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