Percy be praised

The most interesting and important element of the Percy Mistry committee report is not its main brief, proposals on remaking Mumbai a global financial hub. That is crucial, of course, if only because India does have some kind of competitive advantage in the skill-set required for running cutting-edge finance. And because of the economic returns that accrue from hosting an international financial centre. Think what the City (the square mile in London that houses the money merchants) does for the British economy and the argument is clear. But think also how the British central bank — the Bank of England — operates. Or how central banks in most liberal economies operate. It becomes clear then why the Mistry committee recommendations on India’s central bank constitute, in the current policy context, the most interesting and important part of an impressive study.

The committee forcefully raises a question that a few commentators, including this newspaper, have asked: how can the RBI discharge its functions properly, especially in a rapidly changing economy, if it suffers from a multiplicity of responsibilities as well as conflicts of interest in that long list of jobs to do? To put it more pointedly, how can a modernising India be monetarily administered by a central bank steeped in the ethos of the ancien economic regime? That the RBI is overstaffed, that it has a department for promoting Hindi as a language of monetary management may be ignored in the short term. What can’t be is that the RBI’s many roles are directly responsible for current bad policy calls. As we have argued, the central bank is intervening in the currency market to manage the rupee and therefore throttling the exchange rate’s inflation-tempering potential, but it is also raising rates to moderate inflation. Even if the RBI’s rate policy was an effective anti-inflation instrument currently, this contradiction would be serious. It becomes many times worse because the RBI is aggressively misreading factors driving inflation now and in the process is leading a policy that can not only kill growth impulses but also is deeply iniquitous in its impact. The ordinary Indian, in whose name anti-inflation orthodoxy is being sanctified, is taking all the hits.

Therefore, a thorough change in the RBI’s remit and role is not just an expert’s desideratum. It is something that will benefit Indian economic actors at large. Not questioning the RBI’s wisdom has been conventional wisdom for years. The Mistry committee is one more reminder why the central bank should be put through the same scrutiny as other policymakers habitually are.