Banking | Should RBI have a Deputy Governor based outside Mumbai?

Amol Agrawal

The Reserve Bank of New Zealand (RBNZ) has long been a pioneer of many things in central banking. The RBNZ pioneered the practice of inflation targeting 30 years ago in 1989 which soon became a gold standard for central banking worldwide. After the 2008 crisis, it continued to be a pioneer in both monetary policy and financial stability.

The RBNZ has made another recent change which is interesting and worth exploring for other central banks.

Till November 2018, the RBNZ senior management comprised one governor, one Deputy Governor (in charge of financial stability) and two assistant governors — one responsible for economics and the head of operations. On November 2, 2018, the central bank reorganised itself and this led to number of assistant governors increasing from two to five. The new functions given to the three new AGs were: governance, strategy and corporate relations; people and culture and chief financial officer.

Just a year later after this change, on November 14, the RBNZ made more changes. First, it created a new Auckland-based assistant governor position to lead the bank’s ambitious growth and transformation work, and further develop its people and culture. Second, it has de-established the position of assistant governor responsible for people and culture.

RBNZ Governor Adrian Orr remarked that this structural change will support the bank’s growth and transformation plans, particularly in Auckland. “As we explained in our Statement of Intent, we have a vision of ‘Great Team, Best Central Bank’. This means growing our Auckland presence, better connecting with our stakeholders, and building a culture which supports transformation and achievement,” he said.

This is really an interesting development. The RBNZ is based out of Wellington which is the political and financial capital of New Zealand. This is the case with most central banks as well. Some are located in cities which are financial centres such as the Reserve Bank of India (RBI) in Mumbai, the Reserve Bank of Australia (RBA) in Sydney, etc. There are others which are located in cities which are both political and financial centres, such as the Bank of England in London, the Bank of Japan in Tokyo, etc. The case of the Federal Reserve, which is housed in US’ capital Washington DC, is unique — nevertheless, the New York Fed manages and dictates a fair bit of operations of the central bank.

Coming back to New Zealand, Auckland is the most populated city in New Zealand and is nearly 650 km north of Wellington. Thus, if a new position had to be created away from Wellington, Auckland would be the ideal choice. Central banks have offices all around the country but senior management of most central banks (if not all) work in the head office.

One reason for this new change could be the RBNZ wanting diversity in views. After the 2008 crisis, there has been criticism that economists and policymakers come from very similar backgrounds leading to similar views (groupthink) and very little dissent. In fact, the RBNZ, while adding employment to its mandate, has appointed Peter Harris who is an economist with extensive experience in the trade union movement. This is different from the economists who just study and research unemployment.

In similar vein, a new position in Auckland will hopefully bring different ideas to the discussion table, compared to the usual Wellington-based views. It will also bring local economic knowledge from northern part of New Zealand, giving the central bank a more holistic picture of the economy. The Federal Reserve has long used this approach with 12 Regional Federal Reserves providing inputs to Washington.

The RBNZ is a trend-setter and it will be interesting if other central banks also bring similar changes in their structure.

What about the RBI? Interestingly, the RBI has a history on this topic. At its inception in 1934, it had offices in both Calcutta and Bombay before gradually shifting base to Bombay by the 1940s as Calcutta had already lost its sheen. After RBI’s nationalisation in 1949, it had four local boards (north, south, west and east) and these boards nominated one director each to the central board. The purpose of these boards was to give inputs on regional economy and banking. Though, the local boards did not really serve their purpose and the RBI’s history tells us that there have been multiple attempts to abolish the local boards, they continue to remain. Overtime, it is fair to say that the RBI and its senior management operates mainly from India’s financial centre of Mumbai. The RBI has offices all around India, but they mainly do routine work.

Should the RBI take a leaf from the RBNZ and build policy expertise outside Mumbai? Just like political analysts say one should lessen the hold of Delhi on politics, is there a case for lessening Mumbai’s hold on central banking and monetary economics?

As the RBI looks to appoint its fourth Deputy Governor, it might not be a bad idea to look at some of the appointment ideas coming from New Zealand. May be the government could create an Additional Deputy Governor position apart from the existing four Deputy Governors. The discussions on the RBI DGs are mainly around the functional role and we could discuss adding a geographical dimension to the role as well. India is a much diverse and vast economy than New Zealand and needs inputs outside Mumbai.

Where can this new position be based? Perhaps, Bengaluru and Hyderabad could be good choices where the new Deputy Governor could also work around some of the new technology solutions on banking and payments. Or it could be India’s centre Bhopal where the Deputy Governor draws economic analysis all around the country. All places work but not Delhi for the obvious reasons.

Amol Agrawal is faculty at Ahmedabad University. Views are personal.