Power struggles between central banks and the ruling Govt are common all across the world. The question is all about how the central bank digs its heels in and does not all the Govt to shove it around.
That’s exactly what is happening with the RBI and Modi Govt in India right now. We all have known for a long time that the Govt, not just the current one but the UPA too tries its level best to dictate to the RBI what it thinks is right – obviously it has political mileage in mind. But always, RBI under its various Governors has managed to hold its steed and not compromise on its autonomy.
There is mounting pressure on the RBI to bring down the lending restrictions it has placed on some troubled PSU banks. The Govt is also trying to box the RBI into a corner by putting a proposal to set up a new regulator for the country’s payment system.
While there is clearly no case for bringing down the rates, RBI has voiced its voiced its dissent over the Govt’s proposal to set up a regulator for payment systems outside the central bank. An inter-ministerial panel set up to finalize the Payment and Settlement System (PSS) Act had recommended that the payments regulator board (PRB) should be an independent regulator with the chairperson appointed by the government in consultation with the RBI. This has been opposed by the central bank, which wants the chairperson to be from the central bank with a casting vote. The Govt wants full control here while RBI has rightly said that though it does not oppose setting up of the PRB, it should remain with the RBI, headed by the RBI Governor.
This time around, all this dissent is being shown through public speeches. Viral Acharya, RBI Deputy Governor, said at a public event, “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.”
Acharya has warned that Govt meddling in central bank could be catastrophic, citing the example of Argentina, which is a mess today.
And at a speech some time ago at IIT Bombay, on Govt putting pressure to ease restrictions on the 11 banks, Acharya said, “It’s important that the PCA framework to deal with financially weak banks is persisted with. Any slackening of the approach in the midst of required course of action is an all-too-familiar and ultimately harmful habit that we must eschew.”
RBI should not mince words and at every stage where the Govt interferes, it has to state very clearly that which is right and not what is politically right. The Governor needs to be fearless and bold and cannot play; that probably explains why RBI’s outlook is so different from what the Centre at Delhi has been projecting. Delhi needs to fight a difficult election in 2019, Urjit Patel does not have any such power fears.
Monetary policy action cannot give impetus to growth, it needs to be supported by removal of supply bottlenecks and making investment environment more conducive. Big projects are stuck in a morass and unless and until those projects take off, growth will continue to suffer.
The onus for growth is only and only on the Govt. The RBI should not come under any pressure – neither from the Govt nor the market forces to make an economic decision. RBI has always done what is good for the economy. Allow the RBI to do its job and you do yours – that’s the strong message which needs to go across to Delhi, loud and clear.
RBI cannot and should not bow down to the gallery; hope the Govt has the maturity to not meddle with an institute like this!