Column : Is a foreign governor better for RBI?

Dec 04 2012, 03:01 IST
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SummaryA foreign governor may turn out to be the best for England, but the demands in developing economies are more complex.

The appointment of Mark Carney as the Governor of the Bank of England is interesting for several reasons. This is the first time in the history of the bank that an outsider has been chosen on account of his profile being the best. But, getting in an external candidate for the job does raise certain issues, which would be more relevant when it comes to a country like India. Given that we have an external economic advisor, does a foreign central bank governor make sense?

To begin with, the advantages of having a non-resident governor could be looked at. First, a governor of a central bank who has run the affairs of the bank successfully certainly qualifies for candidature. If the performance has been exemplary, one quite clearly qualifies for a set of countries that have similar structures, such as Canada and Englandboth developed countries. But the same may not hold true if a central banker from a developed country were to be considered for a country like ours where conditions are vastly different and priorities less aligned to those pursued in the West.

Second, the outsider can bring in a fresh way of thinking to central banking, especially when this sector is in a state of flux. Experiences from other central banks handling of crises-like situations are always helpful when drawing up strategies for the domestic central bank. The crises witnessed in the US and the euro regions provide sufficient case studies that have been seen through by central banks via different strategies. These are real life experiences and not just from the text book.

Third, any outside governor brings along a certain modicum of independence, which is good since they would be free from past baggage, which can help in running the central bank. Often, one gets bogged down by pressures by the government or industry houses, especially in developed economies, where policy can be guided by them. Therefore, a corollary is that if a country is looking for the best person to run a difficult role such as heading the central bank, it should not matter where the person comes from.

While surely there are advantages in having an outsider, there are a good number of reservations for such a selection, which holds true more in developing countries such as India, and could also hold true for some western economies. First, an outsider is an outsider and would not be aware

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