JOIN USThe Reserve Bank of India Deputy Governor Viral Acharya’s lecture, delivered last week in Mumbai, is an indictment of the government and is the sharpest ever criticism of any government and its policies made by a top RBI official. Acharya has named no names and mentioned no specific incident but has left no one in doubt about the actions and targets of his criticism. After explaining the role of the central bank in a democratic system and making a case for its independence, he explained how it is being undermined in India. There has always been some friction between the RBI and governments in the past. Some tension is even considered necessary. But Acharya’s account gives the impression that the RBI is being sought to be suborned by the Modi government. His views are important, because as he made it plain, they reflect the views of RBI Governor Urjit Patel.
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Acharya cited four specific areas of the bank’s jurisdiction where it has seen interference by the government. These relate to the government’s appointment of a ‘political’ deputy governor, the demand for a higher portion of RBI reserves for itself, a move to limit the RBI’s supervisory control over banks, and the attempt to restrict its regulatory domain over payment banks. He has explained the background of the issues involved, the nature of the issues at dispute and the consequences of a political or populist approach prevailing over the bank’s professional, expertise-based approach. He tellingly demonstrated the difference between the short-term view of the government and the bank’s long-term view with an analogy of the difference between a T20 game and a test match.
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The confrontation has gone so far that Acharya has sounded a warning with the statement that “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.” Unfortunately, the government has chosen to hit back at the RBI with its own chargesheet about inaction over NPAs. The open exchange of fire shows that government-central bank communications have broken down. These channels should be reopened to avert a worsening of the situation. The government should not weaken the RBI by encroaching into its turf, trying to interfere in its working and arrogating decision-making powers to itself as it did with demonetisation. It does not redound to the credit of the government that it has alienated a team that it had itself handpicked after the departure of Raghuram Rajan. The RBI has done well to stand up to the pressures on it.