The Curious Case of the Missing RBI and Its Voice

Even in colonial India, the demand for an independent voice of the RBI had always been very strong. However, the RBI’s voice has been missing for quite some time, particularly since demonetisation, when there were several claims that the regulator was not consulted meaningfully.

In 2016, former Reserve Bank of India (RBI) governor Raghuram Rajan while talking about the importance of the RBI, quoted his predecessor, Dr. Subbarao as saying, “I do hope the finance minister [P. Chidambaram] will one day say, ‘I am often frustrated by the Reserve Bank, so frustrated that I want to go for a walk, even if I have to walk alone. But thank god, the Reserve Bank exists.’

Rajan extended the analogy further by saying that the RBI must not only exist but exist with an ability to say “No!” In the latest move by the government to withdraw the Rs 2,000 note, it seems like both the RBI and its voice, much less its ability to say no, has curiously gone missing.

The magenta flamboyance of a Rs 2,000 note was launched by the Narendra Modi government on November 8, 2016. It is unclear whether the RBI as India’s central bank was consulted on the matter. The new denomination featured the motif of ‘Mangalyaan’, depicting the country’s Mars orbiter, an extraordinary foray into interplanetary space. Therefore, it seems strange for the government to now withdraw the same currency it introduced in 2016, without providing any strong reasons.

On November 8, 2016, almost 86% of the cash in circulation in the form of Rs 500 and Rs 1,000 currency was deemed illegal tender overnight.

The informal economy at that time accounted for 81% of the total employment in the country, with 44% of the total output being cash-intensive.

Demonetisation came with the unspoken penalty of not being digitised enough. If you were cash-dependent, you were penalised for not being part of India’s digital journey. The impact of demonetisation, irrespective of the tax/anti-corruption gains it may have seen, was felt most acutely among the cash-strapped, the dispossessed, who could not board the starship of ‘Digital India’.

Demonetisation still continues to haunt public memory with images of long queues, the collapse of local economies, and cash becoming the main villain in a story mired in evocations of black money, corruption, and jingoistic chants of a new India.

People wait in long queues to exchange their old Rs 500 and Rs 1000 notes outside Reserve Bank of India, in New Delhi, on November 15, 2016. Photo: PTI

The widespread cynicism of the recent move recalls the recurrent image of a state that treats critical economic policies, much less its citizens, with careless abandon.

Also read: Rs 2,000 Banknotes and the Mysteries of This Mini-Demonetisation

The suspects

It must be remembered that economic decisions for the country were never the sole mandate of the state. The state was always bestowed with fiscal responsibilities, distinct from the mandates of the RBI, which were central banking and monetary policy functions.

However, it was always imagined for the state and the RBI to collaboratively frame economic policies, even if the collaborations were governed by colonial laws which favoured the imperialistic impulses of the British state. In some ways, therefore, the diminishing faith in the state today is reminiscent of the establishment of the central bank in 1934.

However, even in colonial India, the demand for an independent voice of the RBI had always been very strong. During the deliberations on the RBI Bill, 1927 by the Joint Select Committee of the assembly, when the British wanted the RBI to be founded as a private shareholders’ bank, the idea was strongly contested by several nationalists. The idea of control in the bank of ‘representative’ Indians was defended fiercely by Purushottam Das, Lala Lajpat Rai, and Madan Mohan Malaviya, among others.

However, on the question of independence, even while arguing for a state-owned bank, Das had argued that financial swaraj before political swaraj was an impossible feat. The solution to an independent central bank lay ultimately in political independence and the existence of robust, fully democratic institutions. Whether the robustness of such political independence exists today to allow financial swaraj of the RBI is perhaps a construct in deciphering where the voice of RBI is.

These colonial laws continue to govern the state-RBI relations even today. But imagine how many times the state and the central bank had consulted each other for various problems. For instance, section 24 of the RBI Act, 1934 bestows the ultimate power on the central government on matters of discontinuance of notes, but it calls for the advisory role of the RBI and assimilates both authorities as part of its operation.

So even though the RBI doesn’t acquire a definitive power of veto from this consultative role, it nevertheless serves a powerful policy intervention objective. This consultative framework of policymaking is also evident in the values underpinning the mission statement in the RBI Act, which includes public interest, integrity, and independence of views – both independent professional judgment and consultative policy formulation.

Mentions of consultation are accordingly peppered throughout the Act and also in the Banking Regulation Act, 1949. These are meant to aid in the holistic development of policy rather than subvert the role of the central bank. As former RBI governor Y.V. Reddy said in his book, this understanding has come to be an established convention, even though the RBI is not a constitutionally entrenched body.

Also read: Recap: Why RBI Board Members Were Not Impressed by Explanations for Demonetisation

The missing voice

However, the RBI’s voice has been missing for quite some time, particularly since demonetisation, when there were several claims that the regulator was not consulted meaningfully, and was overridden when factions within the bank had opposed the move. This was followed by a slew of resignations of RBI governors and deputy governors over the years.

However, since 2018, the RBI’s function as an oppositional force to the government has diminished substantially. This period was marked by the appointment of Shaktikanta Das as the RBI governor, which itself was mired in controversy.

For one, he was the first non-economist to be appointed for the role in 28 years. While the RBI Act, 1934 does not expound on any qualifications for the post, the appointment itself happened without a select committee, with the government refusing to disclose details in response to an RTI query.

Das’s appointment was further extended by three years in 2021, which would make him the longest-serving governor in seven decades in 2024. In this time, the past decade of RBI and the government tussle has come to an abrupt end, and the consultative and sometimes oppositional role of the RBI has seemingly been reduced to a diminutive one.

In the case of demonetisation, not only was the advisory role of the RBI under section 26(2) of the RBI Act disregarded, but parliamentary process itself was abrogated. As stated in the dissenting opinion of Justice Nagarathna in the demonetisation judgment from earlier this year, for a matter as critical as demonetisation, the government could not have done so legitimately without a meaningful discussion and debate in parliament. She held that for any proposal for demonetisation emanating from the government, not only was the view of the Central Board of the RBI relevant and important, but also that of the parliament as the repository of sovereign powers of the people of India. Such a move could not be at the behest of an issuance of an executive notification, for that would mean an exercise of unguided and arbitrary power.

In this context, the withdrawal of the Rs 2,000 note should not be limited to discussions of economic and supply consequences as the RBI has clarified. Instead, it should engender questions of competency and meaningful autonomy of a central bank that has come to encompass several roles – financial inclusion, stability, and monetary authority. Its history reveals useful and necessary contentions with the state on matters concerning public interest and depositor protection, serving as a crucial democratic check against opaque policymaking.

In a speech in 2007, Y.V. Reddy had said that it was within the mandate of the RBI to impart transparency through “enhanced communication” and “emphasise participative nature of decision-making in its activities”, while working towards greater autonomy in monetary operations. Beyond the immediacy of the note withdrawal, the wider concern today should be about the process of economic policymaking in India for the past several years being reduced to unanticipated announcements, without following legislative templates of consultation – legislative policy documents, white papers, stakeholder discussions, etc.

Like the move in 2016, the withdrawal of the Rs 2,000 note has not been at the behest of any public discourse, or robust explanation.

Demonetisation, therefore, not only marked the beginning of an expanding state (over that of a sectoral regulator) but also a changed RBI, one that has begun to either lose, or hide its voice actively. One can only hope for Subbarao’s analogy to make a comeback.

Shohini Sengupta is a PhD student at UNSW Law & Justice, Sydney. She works on issues of digital identity systems and financial regulation.