Demonetisation: Urjit Patel must come out of Modi’s shadow to arrest RBI's unmaking

Demonetisation has shown its many faces to various stakeholders since 8 November. A bold, high-risk reform experiment for the Narendra Modi-government, a big learning for 125 crore Indians on what a disruptive reform actually means to their daily lives and, finally, a trial by fire for the Reserve Bank of India (RBI) that is now fighting to save its image and credibility. The demonetisation episode has inflicted severe damage to RBI’s integrity–something that hasn’t happened in the past even when the central bank had to walk a tight rope through multiple economic crises that originated both in India and abroad. As Usha Thorat, a former Reserve Bank of India (RBI) deputy governor writes in her Op-ed for Indian Express: “There have been times when the Old Lady of Mint Street was criticised for being too conservative and cautious — for not being able to keep up with innovation and markets — never has she been accused of not knowing her job. Never has she been the butt of as many jokes as in the last few days.” [caption id=“attachment_3121922” align=“alignleft” width=“380”]  RBI Governor Urjit Patel. PTI[/caption] Thorat is probably the only voice, so far, among former RBI top brass to speak up openly on the issue of RBI’s eroding credibility. As far as the demonetisation issue is concerned, the RBI has been in a sad state clearly overshadowed by the Modi-government in all respects. Beginning with the decision-making, the roll out and repeated U-turns on rules, all along it appeared that the North Block is in command, rather than Mint Street, when 86 percent of the currency in the country was scrapped in one go by PM Modi in a televised statement. The RBI has remained on the sidelines since then. The RBI, one of the most reputed institutions in the country, known for its credibility and independence (operational) is now reduced to an object of jokes on social media. Thorat acknowledges this in her Op-ed when she wrote, “it is indeed a sad day to see one of the most respected public institutions in India becoming an object of ridicule and scorn”. It appears that the RBI remains clueless at a time the common man is exposed to such massive disruption in his daily life as a result of an executive decision, making it largely inaccessible for him to draw his own money on account of curbs. What was the turning point? Demonetisation has probably been only a trigger to expose the change in the working style of the central bank post the Raghuram Rajan era. The RBI leadership under Urjit Patel has so far been a near-failure to carry forward the virtues the central bank has guarded over several decades. There have been major shortcomings on many accounts, some of which Thorat has mentioned in her piece. These can be summarised mainly into two issues — lack of transparency and absence of effective communication. Beginning late evening of 8 November, government functionaries have dominated the demonetisation scene with the RBI largely reduced to an agency whose job is to only notify what is already there in public domain. At a time when the common man was gripped with panic seeing closed ATMs/ bank branches, long queues (which continues to an extent even now) and uncertainty regarding how long the cash crunch situation will continue, the RBI should have addressed the public to calm nerves and offer firm guidance, but Patel chose to remain silent for a long time. About 60-circulars in just one month of demonetisation doesn’t give a sense to the public that the RBI had any plan or conviction about the demonetisation rollout. Thorat talks about the pressing need for more transparency and effective communication in RBI’s functioning. “The RBI top management must communicate more through the media and speaking opportunities. This is necessary in the interest of transparency and credibility. It generates confidence that the RBI believes in honest communication.” Further, the former deputy governor tells RBI management. “Be transparent. It is good that the RBI has started giving some information on the notes issued and deposited periodically. Doubts have been expressed on the double counting of old notes returned to the RBI. There are press reports that the data furnished by the RBI on notes issued between December 10 and December 19 do not tally between the pieces and values. Data on notes returned to the RBI after December 12 has not been officially released — this is generating enormous speculation whether the notes returned exceed the notes issued.” Transparency has been an issue all along.  This was true for the timely availability of information on the amount of old currency deposits returned to the banking system or regarding the break-up of the new Rs 500, Rs 2,000 denominations infused.  As far as the total chunk of currency infused, the last available data is as on 10 December, which was released on 13 December. According to this, banks have garnered Rs 12.44 trillion (Rs 12.44 lakh crore) in banned notes till 10 December, while they have issued Rs 4.61 trillion. According to Thorat, “The RBI would do well to release every week, say, every Monday, data on the notes issued, denomination and value-wise, as also on old notes returned, to set all speculation to rest.” There are two other instances worth mentioning that gives clues on a break from the past in the central bank’s mode of functioning and preparedness. One is RBI’s decision (read the Firstpost column here  to not invite a number of journalists for the policy presser, the first after the Modi-government announced demonetisation. The second is its major flip-flop on the decision to cap deposits in old currency at Rs 5,000, which was later withdrawn due to public anger.  On 19 December, the RBI issued a notification imposing restrictions which it had originally promised time till 30 December (as also the Prime Minister) to accept old currency deposits without any limit.  “Could it (the RBI) not have refrained from issuing the circular of December 19 that clearly went against earlier assurances and had to be rescinded immediately?,” Thorat asks. It is unfortunate to see an institution of RBI’s repute, which is regarded as one of the best central banks in the world, fighting a trust deficit of this magnitude. The loss of central bank’s credibility will have disastrous impact on Indian economy and lead to bigger problems. There is an immense responsibility on governor Patel, whose credentials for the role at RBI are second to none, to get his act together and take control of the situation, thus regaining the lost image of India’s central bank. Here, Patel would do well to pay heed to Thorat’s caution.