RBI Dep Guv slams Modi govt; says markets can discipline Centre for eroding independence

Emphasising the need for independence in the central bank’s functioning, RBI Deputy Governor Viral Acharya said the market can make the government pay for eroding the bank’s independence

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Emphasising the need for independence in the central bank's functioning, Reserve Bank of India (RBI) Deputy Governor Viral Acharya on Friday, October 27, said the market can make the government pay for eroding the bank's independence.

Speaking at the AD Shroff Memorial Lecture in Mumbai, he said markets keenly watch government's activities which exert pressure on the central bank's independent functioning. His statement assumes significance as their have been instances in the past few years when the government has reportedly tried to undermine RBI's autonomy.

"The market can discipline the government not to erode central bank independence, and it can also make the government pay for its transgressions," Acharya said.

According to an Indian Express report, in a strong reminder to the government, Acharya said the world over, the central bank is set up as an institution separate from the government. “Put another way, it is not a department of the executive function of the government; its powers are enshrined as being separate through relevant legislation.”

Alluding to pressure points in government-RBI relations, he cautioned about excess money supply, which while facilitating ease of financial transactions, including the financing of government deficits, can cause the economy to over-heat in due course and trigger (hyper-) inflationary pressures or even a full-blown crisis that eventually require sharper monetary contractions.

He warned that excessive lowering of interest rates and/or relaxation in bank capital and liquidity requirements can lead to greater credit creation, asset-price inflation, and semblance of strong economic growth in the short term. But excessive credit growth is usually accompanied by lending down the quality curve which triggers mal-investment, asset-price crashes, and financial crises in the long term, he said.

“Markets watch keenly, and if uncertainty grows and confidence in central bank independence and credibility erode, then markets rap bond yields and exchange rate on the knuckles,” Viral Acharya added.

"Markets watch keenly, and if uncertainty grows and confidence in central bank independence and credibility erode, then markets rap bond yields and exchange rate on the knuckles," he added.

He also noted that the market also forces central banks to remain accountable and independent when it is under government pressure.

"The presence of this third player — the market — in the back and forth between a government and the central bank (more generally, regulatory institutions) is an important feedback mechanism," the Deputy Governor said.

Speaking of the current challenges to the RBI's autonomy, he mentioned limited powers with the central bank in taking actions against public sector banks (PSBs) as a major limitation.

"The Reserve Bank is statutorily limited in undertaking the full scope of actions against public sector banks — such as asset divestiture, replacement of management and Board, license revocation, and resolution actions such as mergers or sales — all of which it can and does deploy effectively in case of private banks," Acharya said.

He also said that having a strong balance sheet and adequate reserves is an important part of the central bank's independence from the government.

"A thorny ongoing issue on this front has been that of the rules for surplus transfer from the Reserve Bank to the government," he observed.

He also reiterated the RBI's dissent to the creation of separate payment's regulator for oversee payment and settlement systems.

"A final issue is one of regulatory scope, the most recent case in point being the recommendation to bypass the central bank's powers over payment and settlement systems by appointing a separate payments regulator."

The RBI on October 19, 2018 published a dissent note against the recommendation to appoint a separate payments regulator.

with IANS inputs.

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