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14 February 2017, Gateway House

Retreat of globalisation: central banks in the crosshairs

Central banks play a critical role in forging the country’s international economic relations. Now, with the rule-based order being reset and new regimes getting established, they are better positioned to influence the playing field. It is, therefore, critical to strengthen the Reserve Bank of India so it can drive an agenda closer to the interests of emerging countries. This will also be a test of India’s future leadership capabilities

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This feature was originally written for Where Geopolitics Meets Business, Vol. 2, the compendium for The Gateway of India Geoeconomic Dialogue. 

The narrative regarding central banks has changed dramatically over the past few years. When the global financial crisis struck, they were seen as institutions that rescued banks, provided liquidity and kept the wheels of finance turning. In its aftermath, they were seen as critical to reviving the world economy. Central banks are now perceived as institutions that laid the seeds of the crisis, and, in its resolution, have acted on behalf of ‘the establishment’.

Populist movements see central bankers as a part of the global elite that has driven globalisation, a consequence of which has been growing income and wealth inequalities.[1] This has provoked criticism from the political left; issues of nationalism and definitions of self-interest have sparked a backlash from the political right.

Questions are now being raised regarding the central banks’ power and remit, their independence from government, as well as their democratic deficit where they, as unelected technocrats, make decisions that have distributional consequences.[2] Central banking has turned full circle.

This discordance in the discourse has found a resonance in India, with proposals to reimagine the Reserve Bank of India, its governance structure and its mandate.[3]

Decoupling and coupling into the global discourse

Modern banking in India has periodically coupled into and decoupled from the global discourse. When the Reserve Bank was established in 1935, it synchronised with worldwide initiatives to set up central banks as institutions.[4]

The Reserve Bank was well integrated into the global system. It had an office in London, its bank-notes enjoyed wide circulation in the Middle East and were legal tender in the Trucial States and Kuwait and it actively participated in the Bretton Woods Conference in 1944.

Shortly after independence (1947), its trajectory deviated from the practices and knowledge legitimised by the West. The Reserve Bank drove innovations based on local structural factors, constraints and values and pioneered the development model of central banking, establishing institutions and channelising credit to prioritiy sectors.

This model was at variance with and ‘decoupled’ from the consensus of that espoused by the West. The Reserve Bank, thus, acted in what it deemed to be in the national interest and its decoupling initiatives were emulated by many central banks across the developing world.[5]

Indian commercial banks, which were well integrated into the international system in the late 19th and early 20th centuries, grew more insular after independence. The nationalisation of banks in 1969 commenced the first financial inclusion drive, taking banking from the ‘classes to the masses’.

The idea of statism in India reached its apogee around the early 1980s and gradually receded. The seeds of financial liberalisation and the move towards the market mechanism were sown in the mid-1980s.[6] With the balance of payments crisis of 1991 and the adoption of IMF policy reforms,—the Reserve Bank drove the pace and sequencing of banking sector reforms. It liberalised the sector, allowed entry of new private banks in 1993 to make it competitive, adopted global regulatory norms and put in place the financial infrastructure, to develop and gradually integrate its money, debt and forex markets domestically, and in a calibrated manner into the global markets.[7] Monetary policy evolved from ‘credit policies’ in an administered regime, to monetary targeting, and thence, to a multiple indicator approach.[8] By 2015, India adopted flexible inflation targeting, and in 2016, the the formation of a Monetary Policy Committee broadbased the decision making process.[9]

Central banking thought in India, thus, converged into the global discourse. The Reserve Bank’s membership of the G20 and other institutions with a mandate for global economic governance and cooperation brought India’s markets, payments system, regulatory oversight and governance structures in sync with global practices and aligned it squarely into the ‘liberal’ camp.

While muted voices were heard regarding the compliance costs and relevance of international regulations in the post-crisis scenario to the Indian context, the legal implications and extraterritorial jurisdiction of Inter-Governmental Agreements, such as the Foreign Account Tax Compliance Act, the overwhelming consensus was that the benefits of legitimacy conferred by the international community overweighed the costs of being non-compliant.

Although India had a tradition of collaborative consultations between the Reserve Bank and Government, the Financial Sector Legislative Reforms Commission (FSLRC) sought to curtail the powers of the Reserve Bank Governor, narrow the remit of the Reserve Bank, reform governance structures, bring it under performance audit—which has resonances with “Audit the Fed”—and diminish the stature of the Reserve Bank, putting the monetary authority on par with any other regulator.[10]

The subsequent curtailing of the Governor’s powers to appoint deputies, also reflects tensions between the government and the Reserve Bank on issues of independence and regarding measures seen as politically expedient, but rooted in bad economics.

Today, new non-bank players such as peer-to-peer lenders, telecom companies, payment service and e-wallet providers, and issuers of alternate digital money are blurring the line between banks and non-banks and the concept of money. These disruptions call for new rules.

Turbidity, new regime formations and opportunities

With technology disrupting the rules of the game and international treaties being called into question,[11] the cohesion and convergence achieved in the past 25 years of globalisation are set to loosen. As the rule-based international economic order gets reset and new regimes get established, there lie opportunities to influence the playing field.

To perceive and grasp these opportunities, it would be in the national interest to strengthen rather than enfeeble the Reserve Bank to negotiate issues of international cooperation, such as, the responsibility of dominant countries regarding their monetary policies and sharing their spillover costs;[12] backstop and swap arrangements; issues and costs of over-regulation; money laundering compliance; and the extraterritorial jurisdiction of laws, amongst others.

Bazil Shaikh is presently researching a book on the History of Money in India. Before this, he was a central banker for over three decades, and held positions such as Principal Chief General Manager and Secretary to the Board of the Reserve Bank of India.

The Gateway of India Geoeconomic Dialogue was co-hosted by Gateway House and the Ministry of External Affairs on 13-14 of February 2017. For more details on the event please click here. 

This article was exclusively written for Gateway House: Indian Council on Global Relations. You can read more exclusive content here.

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[1] Bourguignon, François, ‘Inequality and Globalization’, Foreign Affairs, January/February 2016 Issue, <>, last accessed on January 2, 2017.

[2] ‘Blanchard and Summers warn on central banks’ democratic deficit’, Central Banking, 26 March 2013, <>, last accessed on January 2, 2017.

[3] Ministry of Finance, Government of India, Report of the Financial Sector Legislative Reforms Commission – Vol I & Vol II, March 2013 <>

Balls, Ed, James Howat, and Anna Stansbury, ‘Central Bank Independence Revisited: After the financial crisis, what should a model central bank look like?’ M-RCBG Associate Working Paper No. 67, Harvard Kennedy School, 2016

[4] International Financial Conference, League of Nations, Brussels Financial Conference, 1920: the Recommendations and their Application, 1920 <>

[5] Krampf Arie, ‘Translation of Central Banking to Developing Countries in the Post-World War II Period’, The Globalization of Knowledge in History, Jürgen Renn (ed.), Max Plank Research Library for the History and Development of Knowledge, 2012 <>, last accessed on January 2, 2017.

[6] Reserve Bank of India, Report of the Committee to Review the Working of the Monetary System, 1985 (Sukhamoy Chakravarty Report)

[7] Rangarajan C., ‘Banking Sector Reforms : Rationale and Relevance’, in Raj Kapila and Uma Kapila (ed.) Banking & Financial Sector Reforms in India, Academic Foundation, 1998.

[8] Mohanty Deepak, ‘Implementation of Monetary Policy in India’, Speech by Deepak Mohanty, Executive Director, Reserve Bank of India, delivered at the Bankers Club, Bhubaneswar on 15th March 2010, <>

[9] Reserve Bank of India Annual Report, 2014-15 pg. 56 and Reserve Bank of India Annual Report, 2015-16 pp. 43.

[10] Ministry of Finance, Government of India, Chapter 11, 12 and 18 (the Note of Dissent by P J Nayak), Report of the Financial Sector Legislative Reforms Commission – Vol I & Vol II, March 2013 <>

[11] Singh Harsha Vardhana, ‘How Donald Trump may re-negotiate the TPP’, Brookings India, December 2nd, 2016, <>, last accessed January 2, 2017.

[12] Mishra, Prachi, and Raghuram Rajan, ‘Rules of the Monetary Game’, Reserve Bank of India ,Working Paper Series No. 04, March 2016, <>