IMF says monitoring situation in India; bats for RBI’s independence

Finance minister Arun Jaitley (left) and RBI governor Urjit Patel. Photo: HT

Washington: The IMF has said it was monitoring the reported rift between the RBI and the Centre in India, and expressed its opposition to any move that compromises the independence of central banks anywhere in the world.

There were reports of mounting tension between the Ministry of Finance and the Reserve Bank of India (RBI) over the autonomy of monetary policy makers after Finance Minister Arun Jaitley on Tuesday criticised the central bank for failing to check indiscriminate lending during 2008 and 2014 that has led to the present bad loan or Non-Performing Asset (NPA) crisis in the banking industry.

“We’re monitoring the development on that issue and will continue to do so,” International Monetary Fund (IMF) Director of Communications Gerry Rice told reporters on Thursday when asked about the row.

“Just stepping back, as a general principal, and we’ve said this before. I’ve said this before standing here that we support clear lines of responsibility and accountability... And, international best practice is that there should be no government or industry interference that compromises the independence of the central bank and financial supervisor,” Rice said.

This is true across the range of countries that the independence of the central bank and the financial supervisor is of utmost importance, he asserted.

“We regard it as such and we have to make that statement in the context of a number of countries. So, I think that’s probably the best response I can give you,” Rice said, responding to a question on the increasing efforts globally to criticise central banks, including the one by the US President Donald Trump in recent weeks.

The row was sparked off last Friday when RBI Deputy Governor Viral Acharya in a hard-hitting speech warned that undermining central bank’s independence could be “potentially catastrophic”, possible indication of the RBI being pushed to relax its policies ahead of general elections next year.

Sources privy to development said the government had sent at least three letters on different issues under Section 7 of the RBI Act that gives it powers to issue any direction to the central bank governor on matters of public interest.

The standoff was in relation to RBI’s handling of weak public sector banks, tight liquidity in the market and ways of resolving bad loans in the power sector. Some reports claimed that RBI Governor Urjit Patel was considering stepping down if the government were to issue an unprecedented direction.

Without acknowledging that the notices have been sent to the RBI, the Finance Ministry in a statement said that the “autonomy for the central bank, within the framework of the RBI Act, is an essential and accepted governance requirement. Governments in India have nurtured and respected this”.