RBI deputy governor Viral Acharya lashed out at the government for trying to undermine the authority and curb the independence of the central bank in a speech Friday. “Governments that do not respect central bank independence will sooner or later incur the wrath of financial markets, ignite economic fire,” Acharya said, reflecting an unprecedented rise in discord between the Modi government and the RBI.
ThePrint asks:Is Viral Acharya speech just another fight or shows Modi govt’s inability to work with RBI?
Viral Acharya has reacted to govt constantly nibbling away RBI’s power
Samir Ghosh
General secretary, All India Reserve Bank Employees Association
The government is gradually expanding its tentacles into the RBI’s jurisdiction and this is not welcome. The RBI is independent and autonomous. While many have asked why has the RBI deputy governor brought out differences with the government in the public domain, the fact here is that there must have been pressing reasons for Viral Acharya to have talked about it in public. He probably wanted a public debate on this issue.
As the RBI’s independence gets curbed, it is becoming more and more difficult for the central bank to operate. Let us not forget that the RBI is the regulator of all banks in the country and the onus is squarely on the central bank to ensure that the banking system in India is safe and sound. But with this kind of interference, it is becoming difficult to move on important matters. Now, let’s look at the issue of RBI’s balance sheet. According to estimates, there is a capital surplus of Rs 3.6 lakh crore in the RBI kitty and there is mounting pressure on the RBI to transfer part of that money to the government.
That apart, there is also pressure on foreign exchange management with the vulnerability of the rupee increasing. Is this not impinging on the RBI’s autonomy?
Our banking scenario is very vulnerable currently and the need of the hour is to strengthen and monitor the banks. Although this is not the first time that the RBI’s authority is being attacked, this time, the threat is untenable and Viral Acharya has reacted to the government’s constant attempt to nibble at the RBI’s power.
RBI should not see govt suggestions negatively and as curbing of independence
Ashwani MahajanIn my opinion, the independence of the RBI is a farcical and faulty narrative to talk about. What former RBI governor Raghuram Rajan started on the monetary policy front was basically an imitation of the US policy. We need to understand the contours of India. We are looking at the upliftment of society and overall development. We are looking to protect the small while encouraging growth. This is a message that the RBI needs to take in a positive stride and not think of it as a threat to its independence.
The fact is that the RBI is not accountable to the people of this country, the government is. Therefore, the government has to do many things for their welfare and accordingly it sends suggestions to the RBI. Why take suggestions in such negative light?
Also, when the going is good for the economy and India becomes the choice for foreign institutional investors (FIIs), the RBI absorbs all the dollar liquidity and builds its foreign exchange reserves, but what happens when the situation changes? Why can’t they dip into the forex reserves and cushion the rupee and thereby take care of many other things?
There needs to be retraint from both the RBI and the government. If there are issues, they need to talk through but bringing out their differences in the public domain is not in the right spirit. The government has maintained its restrain. RBI needs to exhibit the same.
Public narrative has pitted the government against the RBI
Nirupama Soundararajan
Senior fellow & head of research, Pahle India Foundation
The accountability of both the government and the RBI have been called to question often. Governments are held accountable through elections, however, the RBI cannot be held accountable by the public directly, but only through the elected government. It is only natural that the government and the central bank will have differing viewpoints, but very rarely do these conflicts become full-blown crises. Both institutions are expected to cover the other’s blind side and act as each other’s good conscience. Together they provide the necessary checks and balance, and this is not always a seamless and easy process.
India has many public sector financial institutions. The conflict of interest of the government in regulating them while being the majority shareholder has often been questioned. We seem to be resolving this slowly, even Acharya admits that we have made significant progress in the monetary policy framework.
Somewhere, the public discourse has pitted the government against the RBI. There have been many times in the past, under the term of this government and previous ones, where the government and RBI have constantly been pointing fingers at each other. This is not about who trumps whom. It is about learning to build consent, sometimes easily and many times unwillingly, without compromising the integrity of the economy or financial stability.
Viral Acharya’s erudite commentary seems to have sent markets into a tailspin. But truth be told, Indian markets are fickle and have reacted negatively to much less.
Govt’s moves and lack of support may have created frustration in RBI
Ashvin Parekh
Managing Partner, APA Services
Let us understand a basic concept — the government, regulators and the industry— all in the financial services sector are under stress. While the government has its own compulsions with elections inching closer, the regulator has its own. That apart, the external scenario too is volatile and this has its own ramification. The government, regulator and the industry ideally need to work together in such circumstances. But somewhere down the line, we find severe structural issues and imbalances surfacing.
The recent spat, to my mind, comes from sheer frustration which may have dragged for long. The regulator has been looking for legislative support and has got none. On the other hand, precious time was spent by the RBI to manage the demonetisation impact.
The banking sector has not been doing well and the non-performing asset level is rising. The RBI, which identified the problem at an early stage, had chalked out various mechanisms— corporate debt restructuring, strategic debt restructuring, sustainable structuring of stressed assets and flexible structuring of existing long-term project loans, besides charting out the joint lenders’ forum. None of these measures got the kind of legal backing that the RBI was perhaps expecting from the government. In fact, the RBI has had to abandon each of these in the wake of the insolvency and bankruptcy code (IBC). Despite the IBC, recoveries have not been very robust and banks are continuing to take huge cuts. Amid this, the government was looking at setting up an independent payment regulatory board. This perhaps is creating frustration within RBI.
Modi govt should not forget that RBI is one of the most respected central banks in the world
Mahua Venkatesh
Associate editor, ThePrint
It is nothing new for the RBI and the government to be on different pages. It has happened in the past, and both the government and the central bank have taken solace in projecting their differences in opinion as healthy and a much-required mechanism for a vibrant democracy. But this time things are not the same.
RBI deputy governor Viral Acharya lashed out publicly at the government for not providing it independence and even obliquely brought in a comparison with Argentina. This naturally spooked policymakers and the government is making all attempts to downplay his comments. There is no doubt that this kind of public spat between the two does not augur well.
Having said that, it is absolutely critical to understand that RBI’s independence and authority as a regulator goes a long way in keeping our overall economy and financial sector in good health.
After all, Modi and his men should not forget that the RBI is one of the most respected and credible central banks across the globe. It has attained that reputation due to its sound policies and supervision, and the government must allow it to function independently. Interference in RBI matters has increased in the last few years. The RBI’s plate has been full. From November 2016, it had to manage the demonetisation exercise carried out by the government. It has been focusing on bringing back the country’s banks into good health while managing the foreign exchange market too.
Instead of allowing the RBI to function and giving it more room, the government has been trying to tamper with its internal functioning. The latest was when it proposed to set up a separate regulator to monitor payment mechanism.
By Mahua Venkatesh, associate editor at ThePrint.
Viewed objectively, every aspect of governance is now on par with the concluding phase of UPA II. The only saving grace is that the media continues – preponderantly – to be very deferential.
Mahua Venkatesh put it succinctly what both government and RBI must follow: “It is nothing new for the RBI and the government to be on different pages. It has happened in the past, and both the government and the central bank have taken solace in projecting their differences in opinion as healthy and a much-required mechanism for a vibrant democracy.”
Otherwise, economy will keep on sliding down and down.