Shaktikanta Das’ reappointment raises questions about RBI autonomy

On February 22, former Reserve Bank of India (RBI) governor Shaktikanta Das was appointed second principal secretary to Prime Minister Narendra Modi. Das earned high praise for his stint as RBI governor from 2018 to 2024. He came in during highly trying times as then governor Urjit Patel had resigned before the end of his term, and there were increasing pain points between the government and the central bank. Das was also seen as a bureaucrat lacking economic expertise.

Das not just rallied through all these conflicts and criticisms but also created his own legacy as the second longest serving RBI governor. However, the government appointing Das as principal secretary within three months of his retirement raises uneasy questions.

Many reasons were cited for the 2008 global financial crisis. One of them was the ‘revolving door’ between the United States treasury, the federal reserve, and the financial sector. The key executives from these three sectors moved seamlessly from one sector to the other. It was as if there was this freeway between New York and Washington allowing for this effortless transfer of officials. The result was that the regulatory capture of the government and central bank by the financial sector. The policies not just allowed multiplication of risks in the financial sector, but also creation of high moral hazards where any losses from the risks were to be borne by the government. This revolving door was not just seen in the US but in other developed economies as well.

In this discussion on the revolving door it is important to point that governments and central banks are expected to maintain a symphony, but not a revolving door. The essential of macro-economics is co-ordination between fiscal policy and monetary policy to achieve common goals of high growth, low inflation, and low unemployment. In most countries, governments own central banks and appoint its key executives.

However, the research on central banks also points to the need for independence (or autonomy) of central banks from the government. If the central banks are not independent, their policies become subordinate to the government. A subordinate central bank, in turn, tends to have a more expansionary monetary policy leading to higher inflation. Hence, an independent central bank is more likely to perform better on macro-economic objectives which is the main goal of a macro-economic policy.

The key for the government is to balance its co-ordination with the central bank while maintaining the latter’s independence. Governments balance this by appointing central bank officials and giving them targets (like to contain inflation), and let the appointed officials work autonomously in setting monetary policies. The government can intervene when set targets are not achieved. If the basic assumption behind these appointments is that one can join the government or the financial sector after retirement, the basic tenet of independence is compromised.

In India’s case, the RBI Act (1934) specifies that the government appoints all key executive positions (even non-executive positions) of governor and deputy governors. Until the 1991 reforms, the RBI was subordinate to the government, and the question of independence did not arise. After the 1991 reforms, market liberalisation also led to the RBI’s broader independence.

The government has appointed eight governors since 1991 excluding S Venkitaramanan who was appointed in December 1990. Of the eight governors, four are from Indian Administrative Services: Y V Reddy, D Subbarao, Shaktikanta Das, and Sanjay Malhotra (the current RBI governor). The other four are economists: C Rangarajan, Bimal Jalan, Raghuram Rajan, and Urjit Patel.

Only two of these governors, Rangarajan and Reddy, were appointed by the government after their RBI governorship. Rangarajan was appointed as Governor of Andhra Pradesh, chairperson of the 12th Finance Commission, and chairperson of Prime Minister’s Economic Advisory Council. Barring the AP governorship, the other two roles were of an economic nature. Rangarajan was a key member of the 1991 reforms team, and was appointed to these advisory roles for his wide expertise on matters of economic policy. Reddy was also appointed chairperson of 14th Finance Commission because of his economics expertise.

In Das’ case, his appointment as principal secretary of the prime minister is different from the above-mentioned reappointments. After Das’ retirement, RBI Deputy Governor Michael Patra, who was in-charge of the monetary policy department, retired. The government has to date not appointed Patra’s replacement.

While prima facie it might appear that there is nothing wrong in Das’ reappointment after his retirement as RBI governor, for the sake of RBI independence not coming under question, these post-retirement sinecures must be avoided. The lakshman rekha demarcating the government and the central bank must be always respected and blurring it defeats RBI’s independence.

There were also cases of a few RBI deputy governors joining the financial sector in an advisory role which raises questions of conflict of interest. There is a need for a wider debate and proper rules on post-retirement roles not only for key RBI officials, but for the higher bureaucracy as well.

(Amol Agrawal is an economist teaching at Ahmedabad University.)

Disclaimer: The views expressed above are the author's own. They do not necessarily reflect the views of DH.