RAHUL  BAJORIA  ON  RBI

The Story  of the Reserve Bank of India by Bajoria ; Published by Rupa ; Pages 281 ; Price Rs.595/-

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The “ Economist ” of London while reviewing Prof.P.R.Brahmananda’s book “Principles of Maximisation of Welfare” wrote “The learned Professor has proved that he has read all the books on the subject—proof that was not  required”. A similar comment can be made of the book under review “ The Story of the Reserve Bank of India” by Rahul Bajoria. He has read all  the books on the subject and he quotes  profusely. There are a forbidding number -- 693-- of  endnotes !.

The author cannot claim much of a close association with the  R BI. He is a post-graduate from the National University of Singapore. Too, he has a decade of service in Barclays in the Asia Desk.

 The book is an attempt to analyse the evolution of R B I and closely studies its autonomy and role in financial development of the country. Bajoria also assesses the role of different Governors and their link with the Finance Ministry.

As everyone knows RBI  played an important role in the Nation’s economic development. Its role since the 1991 reforms has resulted in introduction of best practices in India’s financial markets, especially in the theatres of bank regulation, minority investor protection and bond market relationship . The RBI occupies the primal position in India’s financial labyrinth and it is bound  to play an increasingly dominant role.

Chapter One is on the origins of R B I. There is the mandatory journey taking the reader through, the Fowler Committee, the Chamberlain Commission, the Hilton-Young Commission with the celebrated quote of Lord Montague Norman— “the RBI  should  treat the relationship with the Bank of England as that of a  passive Hindu housewife.”

Rahul moves on to deal with nationalisation of RBI, the advent of the S B I,  the infamous connection between Governor Benegal Rama Rau and the hot-headed T.T.Krishnamachari leading to the Governor’s resignation, the Mundhra scam, the 1966 devaluation of the Rupee and inauguration of the Deposit Insurance Corporation.

We are furnished details of Bank nationalisation which has been covered in a masterly way in D.N.Ghosh’s book “No Regrets”. Next comes the foolhardy intervention of Sanjay Gandhi and the imposition of his henchman Shri.K.R.Puri as Governor. This period also witnessed  the deplorable  and  ignominious exit of Shri.R.K.Talwar from the S B I.

Bajoria analyses the second round of Bank Nationalisation and the establishment of special institutions like Nabard, etc.

The much-bandied subject of “Devaluation” is discussed in one chapter. Narasimha Rao’s single largest reform was Industrial delicensing. By one stroke Government abolished industrial licensing for all industries except eighteen industries on the negative list, regardless of the level of investments. Same time Manmohan Singh presented his historic  Budget which the London Economist called “an economic revolution”

The other significant event was  the  Harshad Mehta scam and its repercussions. Bajoria writes of the Epochal moment in India’s banking system and for the RBI  in September 1994,when the Government signed an agreement with RBI to phase out direct and unlimited monetisation of the fiscal deficit, thus giving the R B I  greater control over its monetary policy. Details are furnished of the Reports of the Committee—headed by Shri.S.S.Tarapore—on preparing a road map for full Capital Account Convertibility.

The Rangarajan era saw not only a significant change in both the regime and form of the Central bank, but also fundamental changes such as the phasing out of ad hoc treasury bills, full convertibility and the reintroduction of private banks into the banking system,

Rangarajan’s successor, Dr.Bimal Jalan  changed the course of monetary policy by postponing the CRR cuts announced in the earlier policy decisions and tightening short-term liquidity in the money market through a new instrument of fixed rate repo- transactions.

The second Narasimham Committee report advocated greater autonomy for public sector banks and a reduced role for the Government and RBI in running the banks, along with a gradual reduction in government ownership to 30 per cent. It also recommended reduction in number of public sector banks through mergers in order to create internationally competitive institutions.

Bimal Jalan presided over one of the longest periods of monetary easing in RBI History. He declared that his term in RBI was spent in demystifying policy making as that led to transparency—accountability—responsibility.

Dr.Reddy succeeded Dr.Jalan and had a long term of five years. The Market Stabilisation Scheme introduced during his term allowed the RBI  to issue special securities to withdraw excess liquidity on behalf of government. This boosted the RBI’s autonomy to conduct its monetary policy. The Reddy era has been presented clearly. As all are aware Dr.Reddy obtained a certificate from no less a person than the Nobel Laureate Joseph Stigler  who  declared, “If America had a central bank chief like Y.V.Reddy, the US economy would not have been in such a mess”Reddy success fully insulated India from being burnt by the flames of the Global crisis.

There was a ding-dong battle between the next Governor Dr.Subbarao and the Finance Minister Pranab Mukherjee--- even resulting in rejection of an extension of the term of Ms.Usha Thorat---who had a brilliant track record. The Government set up a Financial Stability Development Council. The Finance Minister was not happy with RBI’s aggressive positioning on monetary policy.

Subbarao was succeeded by the “Rockstar” Dr.Raghuram Rajan who announced --on his Day One--a string of  measures to stabilise the currency, improve confidence and increase the flow of foreign capital to boost reserves. Rajan declared in his book “I Do What I Do”—“The key policy objective was to present a façade of confidence, to assure the public and the investors that RBI knew what had to be done.” Rajan’s re-orientation of monetary policy won him international acclaim Rajan won “The Central Banker of the Year” Award. However he decided to return to Academia at the end of his three-year term. Government announced the appointment as Governor Dr.Urjit Patel, then sitting Deputy Governor.

 “Demonetisation” attracts one full chapter discussing pros and cons. The author quotes Dr.Y.V.Reddy—he said that he would  have advised the Government against demonetisation had he been Governor. He further added, “If overruled, I would have admitted myself in hospital and resigned after some time.”

From RBI’s point of view the exercise has been stressful and laborious and it has not necessarily added to the Institution’s credibility in the short term.

The book will be useful for students of economics and those interested in the history of banking in India.

P.P.Ramachandran.

28/10/2018.