Mr Jaitley; for the sake of the country, let Rajan do his job on RBI's HR restructuring

There seems to be a growing disconnect between the Reserve Bank of India (RBI) and the new government at the centre, of late. This disconnect is profoundly visible regarding the proposed human resources (HR) restructuring within the cadres of the central bank.

On Thursday, the RBI put out a press release detailing a proposed HR restructuring exercise in the central bank, which, the apex bank said is necessitated in the face of changes in the global and domestic economic environment.

Going by the RBI release, there are three key changes the central bank wants to have in its cadres. The grouping of RBI’s 27 departments into five clusters, appointment of a chief operating officer (COO) in the rank of a deputy governor to take care of the fifth cluster (RBI has four deputy governors presently) and the creation of a fifth deputy governor post.

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The release didn’t specify if RBI plans the COO post as a temporary one till it gets the necessary changes done in the legislation to have a fifth a deputy governor post. If that is the case, the COO will be re-designated as a deputy governor once the Act is amended. That seems to be the logical idea.

The finance ministry was quick to respond to the RBI’s release. Financial Services secretary, G S Sandhu has said that the ministry has asked the RBI to justify the creation of the new post. Government insiders say the ministry is not keen for the suggested changes for reasons of its own.

Ever since the HR restructuring plans appeared floating in media, the name of Rajan’s former classmate at IIM-A and a former deputy managing director with ICICI Bank, Nachiket Mor, is being rumored as a likely candidate to the COO/fifth deputy governor post.

Talking to FirstBiz, Mor described the rumors as ‘false" and “baseless’. He was not even aware that ’this issue is even being discussed”, Mor said. The rumors must have born from governor Raghuram Rajan’s liking of Mor, reflected from Rajan’s first day in office as RBI chief.

Mor was called to prepare a plan to lay out a financial inclusion roadmap for the country and was also inducted in a high-power panel to scrutinize the new banking license applicants, along with Bimal Jalan, Usha Thorat and C B Bhave (all three former regulators).

On a closer look, once can see that Rajan has already accepted some of the key proposals of Mor such as creation of a payments bank and smaller banks. Why Mor may not find his way easily to the central bank’s executive body so easily? One, there is huge lobbying within the central bank, which is a key, decisive force whenever top-level appointments (till deputy governor level, the governor’s appointment is an altogether different game) happen.

Some of them don’t want Mor, an outsider, to take a key position in the central bank. The role of a COO, if indeed the appointment takes place, will be somewhat like an overseer to the operations of all departments at the central bank, which, some of the veterans of RBI may not take in good humor.

Second, RBI isn’t an autonomous body. Theoretically, the finance ministry is the boss of the RBI. The North block wouldn’t be too comfortable to accept a critical proposal from the central bank’s board, which didn’t originate from Delhi. In the 17-member RBI board, government has only a minimal representation.

Regardless of whether Mor will be given the COO/deputy governor post, the critical question is this. What is the ground for the finance ministry questioning the logic of the RBI central board in making necessary changes in the central bank’s top executive body. Does the ministry know more about the operations of RBI than the central bank itself? Or is it just taking the shape of an ego battle?
Equipping the Indian central bank machinery with more power to execute the large-scale reform agenda is critical to keep pace with regulations at global level and in an increasingly complex financial system in the domestic market.

Currently RBI has 27 departments, with responsibilities ranging from monetary policy formation to banking operations to currency management to management of government’s borrowing to financial inclusion of half a billion excluded citizens of the country. The complexity of each of these portfolios are increasing day by day given the rapid growth in the size of India’s financial system and its increasing interconnectedness to the global financial systems.

Ever since Rajan took charge as RBI governor, from his very first day, he has attempted to bring in large-scale, much needed reforms within and outside the central bank. One must thank the former International Monetary Fund economist, who has tremendous experience in dealing with the financial systems of multiple economies, for doing that.

There is every reason to believe that the idea of bringing in changes to the executive management of RBI is a brainchild of Rajan, very similar to the ideas of floating smaller and differentiated banking regime in the country and, for the first time, focusing on prices of retail items as core yardstick to assess price movement for monetary policy formation. The post of COO is common in some of the central banks abroad such as the central bank of Ireland.

In the 67-years of independence and 79-years of existence of the Reserve Bank, the apex bank has seen very little structural changes in its operations and vision. Even at the government level, the quest of fundamental changes in the governance architecture of the country is visible with Prime Minister, Narendra Modi announcing the plan to quash the planning commission and replace it with a new institution.

If Rajan is attempting to bring in the much needed to changes to regulate the country’s Rs86 trillion banking system in a more effective manner, the finance ministry must stay away from his path and facilitate the execution of the new ideas, for the good of 1.23 billion people of the country.