Mumbai: Reserve Bank of India (RBI) deputy governor Viral Acharya on Friday stressed the importance of a central bank’s independence and said direct intervention and interference by the government in the operational mandate of the central bank negates its functional autonomy.
Acharya pointed out instances where undermining the central bank’s independence is regressive. This occurs, he said, when the government is seen making efforts to dilute the central bank’s policies and effectively coercing the central bank into such dilutions with banks and private sector spending more time lobbying for policies that suit them individually.
It also happens when important parts of financial intermediation are kept outside the ambit of the central bank as systemic risks can build up in shadow banking.
“The central bank can of course make mistakes, and is generally held publicly accountable through parliamentary scrutiny and transparency norms. This way, the institutional arrangement of independence, transparency and accountability to the public not only balance but also strengthen the central bank’s autonomy," said Acharya.
A central bank performs several important functions for the economy, Acharya said. It controls the money supply and sets the rate of interest on borrowing and lending money, he said.
“[It] manages the external sector including the exchange rate and supervises and regulates the financial sector, notably banks. It often regulates credit and foreign exchange markets and seeks to ensure financial stability, domestic as well as on the external front," he said.
Acharya pointed out weaknesses in maintaining the independence of RBI and said that it is important that RBI is statutorily limited in undertaking the full scope of actions against public sector banks (PSBs). These include asset divestiture, replacement of management and board, licence revocation, and resolution actions such as mergers or sales , all of which it can and does deploy effectively in the case of private banks, he said.
The world over, Acharya said, the central bank is set up as an institution separate from the government. It is not a department of the executive function of the government. Its powers are enshrined as being separate through relevant legislation, he said.
A government’s horizon of decision-making is rendered short, like the duration of a T20 cricket match, by several considerations, Acharya said.
“There are always upcoming elections of some sort—national, state, and mid-term. 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," he said.
However, a central bank, Acharya said, plays a test match, “trying to win each session but importantly also survive it to have a chance to win the next session, and so on".
The RBI and the government have not been on the same page on quite a few matters recently.
Last week, the RBI had said there is no case for having a regulator for payment systems outside the central bank. It had submitted a dissent note against certain recommendations of the inter-ministerial committee for finalization of amendments to the Payment & Settlement Systems Act, 2007.
While the government has been pushing RBI to relax prompt corrective action (PCA) norms for banks, RBI is understood to have rejected the proposal discussed at its board meet earlier this week.