Subbarao's ten commandments to turn RBI into a knowledge institution

The last five years have seen many a financial crisis. Central banks around the world have been both blamed for it and tested by it. The crises have opened up debates on the freedom, accountability and responsibility of central banks and the role they play beyond monetary policy. "There will be changes. We do not know what they are. But the Reserve Bank of India can respond to future crisis better by becoming a knowledge institution," D. Subbarao, Governor of the apex bank, said on Wednesday (July 3), in Chennai. He was speaking on "Changing role of the Reserve Bank of India" to commemorate the golden jubilee celebrations of the Reserve Bank Staff College.

So how can RBI become a knowledge institution? "By becoming a storehouse for knowledge and then using that knowledge to achieve our goals," said Subbarao. He then outlined 10 steps that the RBI could take to reach that goal.

Learn to manage monetary policy in a globalised world
Before the 2008 financial crisis and the more recent euro crisis, central banks in emerging markets were of the firm opinion that their economies were decoupled from the developed world. But the crisis hit every country and showed us the power of globalisation. "Today we need to interpret global developments and include them in our policy. Recently the Federal Reserve chairman made a statement on withdrawal of stimulus which was not new but the markets reacted strongly. We need to know how to handle such developments," Subbarao said.

Develop intelligent, mature and balanced judgement
Managing monetary policy during a crisis is easy. It is only after the crisis that the policy needs to be calibrated. Exiting monetary easing post crisis is the challenge. "It is like a chakravuh - getting in is easy but getting out is difficult," Subbarao said, speaking of his experience over the last few years. There are other pressures, Subbarao explained using anecdotes. "When the Bank of England decided to extend insurance to all the deposits during the financial crisis, many policy makers in India wanted similar action by the RBI," he said. The RBI did not follow suit because Indian banks were safe and any move to guarantee all deposits would send a wrong signal and set off panic in the market. Such judgements are important, Subbarao added.

Be open-minded, carry no dogma
"When new evidence comes in, we must be ready to shed previously held positions," said Subbarao. "Lots of people have asked us why the RBI is now allowing corporate houses into the banking sector when it did not do so in 1993 and again in 2003," he said. "Our answer is that the world has changed. We have debated the subject. The decision has been taken in the best national interest."

Become a learning institution
Every occasion is a learning opportunity. Research has shown that every financial crisis in the last 800 years was caused by the same fundamental reasons. We need to have humility. "Recognise what we know; what we do not know and the fact that we cannot control everything," Subbarao said.

Become an institution that generates knowledge
"In the RBI we need to do more quality research and publish papers in internationally prestigious papers," the governor said. He also called upon senior officials at the RBI to be open to a plurality of views and listen to younger officers who may have a different opinion. "Knowledge cuts across hierarchy," he added.

Be open, communicative and consultative
After the 9/11 attack, the Federal Reserve released a two sentence statement saying that their system is open and functioning. This, Subbarao said, had enormous impact on the global financial market. Similarly, the European Central Bank President, during the recent euro crisis made it clear that "we will save euro whatever it takes". This statement prevented the collapse of euro. Central banks need to be communicative. This wasn't the case before. Today central banks give forward guidance. "We spend the maximum time in nuancing and wording the forward guidance," he said.

Have extensive outreach
Even though the RBI has a natural affinity to operate from an ivory tower, it cannot do so. It has to make an effort to understand the real India. "We have an outreach program where the governor and the deputy governors visit at least two villages a year," he said. He went on to explain how the experience was a valuable one.  "It taught me how different demographic groups have different priorities. The younger group was worried about growth while the elders were concerned about inflation," Rao said, recalling one such meeting in Chennai.

Take accountability seriously
"In no institution in India other than the RBI do unelected officials make polices of great importance. In my view the RBI governor, just as is the case in the USA and the UK, should go before a parliamentary panel and render accountability," he said.

Think Positive
RBI needs to interpret facts positively, he felt.

Be driven by values and ethics
There is no code of ethics in RBI. "Much of what we do is guided by our inner judgement. We need a strong code of ethics. Our conduct should be driven by values," he said.