‘Reverse Bank of India’: How note ban has turned a revered institution into a joke
The way Prime Minister Modi pushed through demonetisation and the chaos that followed expose a key weakness – the country’s hallowed central bank has no real autonomy
Former Bank of England governor Mervyn King would say boring is the ultimate quality of central banks. The wild excitement of demonetisation now makes one pine for the Reserve Bank of India’s stellar, boring old days.
Through India’s socialist years and then through its reluctant transformation into market economy, India’s central bank has come to symbolise to its people a repository of knowledge, wisdom and stability, its corridors walked by technocrats from the rarefied world of finance whose econospeak might sound abstruse but created an aura of competence. Men in suits – and they were always men, and always in suits – who seemed to have a lock on matters of high finance. But ever since Prime Minister Narendra Modi announced the withdrawal of 500 and 1,000 rupee notes from circulation in early November, this once steady hand on the tiller has looked unnervingly wobbly.
The currency ban, which Modi said was aimed at removing “black money” – as unaccounted wealth is called in India – removed 86 per cent of the money in circulation in one go. First hailed as a decisive strike against India’s endemic corruption, public anger began to mount as it became clear that the central bank, the sole authority with the right to issue currency, had not arranged for enough notes to replenish the old stock. Even the ATMs had not been recalibrated to dispense the new 2,000 rupee note. As a result, banks have witnessed serpentine queues, small cash-run businesses have ground to a halt and farmers have struggled to find the cash to buy seeds and fertiliser in sowing season. To make matters worse, the RBI has been changing rules on cash exchange, withdrawals and deposits almost on a daily basis.
One of the biggest victims of the resultant chaos has been the RBI itself; its reputation as one of the most respected institutions in India – right up there with the Supreme Court and the armed forces – lying in tatters. Standard & Poor’s director Kyran Curry last month said demonetisation has “cast a shadow over the RBI’s competence and independence”. The opposition Congress party now calls it the “Reverse Bank of India” for constantly making new rules and then withdrawing them under public pressure.