Friday’s A D Shroff Memorial Lecture by Reserve Bank of India Deputy Governor Viral Acharya on what the central bank views as an assault by the government on its independence should not be ignored as just another point of friction in government-central bank relations. Acharya cited three specific areas of interference by the government — demanding a higher portion of RBI reserves for transfer to government coffers, limiting RBI’s supervisory control over public sector banks, and restricting RBI’s regulatory scope, for instance, over payment banks. He asked the government to back off before the market forces it to pay for these transgressions. He did not mince his words: “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.”
Across the world, governments are at loggerheads with their central banks. The political executive pushes for growth, better incomes, more jobs. The central bank strives for low inflation, and banking stability. It is difficult to question either of these objectives, the quibbling is more on the sequencing and pacing of interventions. Politicians have to face elections, and are generally in a hurry. Central bankers worry about the sustainability of growth. A degree of irreverence towards each other is par for the course. In fact, it provides space for discussion, deliberation and dissent. In India too, verbal duels and friction have characterised RBI-government relations. Bureaucrats, appointed as RBI governors in good faith with the hope that they would smoothen relations between North Block and Mint Street, acquire an altogether new vocabulary in Mumbai.
That Acharya’s speech had the backing of Governor Urjit Patel is clear from the footnote, where he expresses gratitude to Patel for suggesting central bank independence as a theme to explore for the speech. So this was the official RBI view. There are definitely more instances than the three cited by Acharya where the central bank perceives government interference as a problem. This turn of events between the government and the RBI is unfortunate, and could not have come at a worse time. Banks are all choked up due to bad loans, bankers aren’t taking decisions fearing retribution for errors in judgement, and a liquidity crisis looms large over non-banking finance companies. Acharya’s outburst reflects a hardening of positions, and a breakdown in communication between the regulator and the government. This needs to be addressed, and urgently so. It is critical for the government, more so one with a decisive majority, to not just respect the de jure autonomy of institutions, but also ensure de facto independence in their functioning.