Congress President Rahul Gandhi is up in arms against the Narendra Modi Government for what he calls an attempt to “undermine” the autonomy of the Central Bank. However, while doing so he may be forgetting the legacy of his own great grandfather Jawaharlal Nehru.
Rahul, perhaps is unaware of the series of events involving his great grandfather and and then RBI Governor, Sir Benegal Rama Rau, which remained the favorite topic of the nation’s media for quite a sometime.
Rau, a civil servant, became the fourth Governor of the Reserve bank and spent a period of more than seven and a half years in the office before eventually resigning over certain disagreements with none other than Prime Minister, Jawaharlal Nehru himself
Rau had raised his objections to several aspects of a budget presented by erstwhile Finance Minster, TT Krishnamachari. However, giving absolutely no importance to the opinions voiced by the Central Bank governor, the then Finance Minister made it clear that RBI was part of “the various activities of the government”. To this, Rau accused TTK of being “rude.”
In the Budget, the government had proposed to increase the stamp duty on an instrument used by lenders to get loans at a discount to RBI’s key policy rate – the bank rate. RBI argued that the higher stamp duty, which it said was decided without prior consultation, would push up the bank rate by half a percentage point.
The RBI believed that TTK’s Budget proposal would effectively push up interest rates and forwarded a resolution of the central board. “The board requests the government to consult RBI in advance on all matters which significantly affect the monetary structure and policy,” the board said on December 12, 1956.
As the tussle between the Ministry and the Central Bank did not seem to be ending, Jawaharlal Nehru decided to intervene into the situation. Nehru wrote a letter to the RBI Governor, in which he made it explicitly that RBI may voice some advises but it can’t have a different policy than that of the Government.
Nehru said it would be “completely absurd” if the central bank followed a different policy because it did not agree with the government’s objectives or its methods.
“You have laid stress on the autonomy of the RBI. Certainly it is autonomous, but it is also subject to the central government’s directions…. Monetary policies must necessarily depend upon the larger policies which a government pursues. It is in the ambit of those larger policies that the RBI can advise. It cannot challenge the main objectives and policies of government,” asserted Nehru.
“When you talked to me I pointed out to you that it was for the central government to lay down policies and the RBI could not obviously have policies contrary to those of the central government. You agreed with this. And yet I find in your memorandum a different point of view,” he added.
Rau responded to Nehru, saying that despite differences of options nothing had been leaked from the part of the government. He also argued that Government must give RBI an opportunity to place all the facts, figures and its views before taking any major decision on “technical and sometimes complicated monetary issues”. Within a few days from this, Rau resigned.
(With inputs from TOI)