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RBI second-in-command speaks up, warns govt against undermining its role

Apart from making the policy tussle between the government and the RBI public, the speech showcased a unique show of strength by the central bank

RBI second-in-command speaks up, warns govt against undermining its role
RBI second-in-command speaks up, warns govt against undermining its role

New Delhi: The RBI’s second-in-command, Viral Acharya’s latest statement has brought into the spotlight the intensifying tussle between India’s central bank and the government. While delivering AD Shroff Memorial Lecture in Mumbai on October 26, Acharya warned the government and the country of the perils of undermining the independence of the RBI and sought more powers to regulate the public sector banks (PSBs).

He cited the Argentine government’s meddling into the affairs of the country’s central bank in 2010 to show what all can go wrong and said, “Governments that do not respect central bank independence will sooner or later incur the wrath of financial markets, ignite economic fire and come to rue the day they undermined an important regulatory institution.”

Key takeaways from the speech

Acharya compared the government’s decision-making to a T20 match to show that it is short-sighted in comparison to the RBI, which is focussed on winning at the end of a long-drawn Test match. “A government’s horizon of decision-making is rendered short, like the duration of a T20 match (to use a cricketing analogy), by several considerations. There are always upcoming elections of some sort – national, state, mid-term, etc. As elections approach, delivering on proclaimed manifestos of the past acquires urgency; where manifestos cannot be delivered upon, populist alternatives need to be arranged with immediacy. In contrast, a central bank plays a Test match, trying to win each session but importantly also survive it so as to have a chance to win the next session, and so on.”

A government’s horizon of decision-making is rendered short, like the duration of a T20 match (to use a cricketing analogy), by several considerations. There are always upcoming elections of some sort – national, state, mid-term, etc. As elections approach, delivering on proclaimed manifestos of the past acquires urgency; where manifestos cannot be delivered upon, populist alternatives need to be arranged with immediacy. In contrast, a central bank plays a Test match.” — Viral Acharya

Warning against the dangers of securing short-term goals, Acharya put the spotlight on PSBs and made a case against sweeping off the bad loans accumulated by them under the carpet. “Sweeping bank loan losses under the rug by compromising supervisory and regulatory standards can create a façade of financial stability in the short run, but inevitably cause the fragile deck of cards to fall in a heap at some point in future, likely with a greater taxpayer bill and loss of potential output,” Acharya said.

“Unfortunately, not all politicians are thoughtful. Not all have the patience to wait for long-term gains. Not all are pleased when appointees refuse to bow to their wishes. And not all are respectful of inherited institutions and conventions, be they central bank independence or, more broadly, the division of powers,” he said. Acharya also criticised the Centre’s decision to ask for a greater share of surplus at a time when there is a need to make the RBI’s balance sheet stronger and the recent recommendation by the government to bypass the central bank’s powers over payment and settlement systems by appointing a separate payments regulator.

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The policy tussle between RBI and govt is now public

The triple whammy of rising oil prices, depreciating rupee and a market that has chalked a downward trajectory spells trouble for the Centre as the country goes to vote in the General Elections next year. As 2019 draws closer, the government has been trying to prevail on the RBI to make policy changes that can put the economy back on track, at least for a short term. However, with Acharya’s speech, the RBI has mounted a robust defence against what it sees as interference from the government. Apart from making the policy tussle between the government and the RBI public, the lecture showcased a unique show of strength by the central bank.

A message was conveyed when Acharya chose to thank RBI Governor Urjit Patel in his speech for allowing him to dwell on the topic and spoke in the presence of his colleagues — three of his fellow deputy governors. While the RBI is not statutorily independent because its Governor is appointed by the government, it enjoys autonomy in matters of fixing rates.

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