Once again, the issue of independence of Indian institutions from the clutches of the government has been put in the forefront. Recently, on October 26, Reserve Bank Of India (RBI) deputy governor Viral Acharya, during a speech, raised the contentious issue of the central bank’s independence and its lack of power. Just days after his remarks, the Reserve Bank Employees Association sided with Acharya and said that “undermining the central bank is a recipe for disaster”, reported The Economic Times.
What did Viral Acharya say?
The tussle between the central bank and the government is nothing new. Acharya in his speech said, “governments that do not respect central bank independence will sooner or later incur the wrath of financial markets, ignite an economic fire, and come to rue the day they undermined an important regulatory institution.”
In his speech during the AD Shroff memorial lecture at Mumbai, Archarya spoke against the government’s pressure to relax asset qualification norms reported The Times Of India. In his over 85-minute-long speech, he also spoke about the need for more leeway for RBI, especially when it comes to regulating state-run banks where the RBI does not have the power to effect management changes and balance sheet management. Explaining the fundamental differences between RBI and the central government, Acharya said, “A government’s horizon of decision-making is rendered short, like the duration of a T20 match…There are always upcoming elections of some sort. In contrast, a central bank plays a test match, trying to win each session but, importantly, also survive it so as to have a chance to win the next session.”
For him, an important reason why the RBI has to function independently was to protect the economy from such short-termism. However, certain recent measures like setting up the monetary policy committee and setting the interest rate had reinforced its autonomy. He also spoke against the government’s pressure to relax the asset qualification norms and said that it can only bring short-term financial stability.
He also talked about the situation in Argentina in 2010 and said that issues faced by countries like Turkey are related to the central bank’s independence. He also spoke about situations in which RBI’s independence can be undermined, like appointing government officials in key positions. Reportedly, Acharya also thanked RBI governor Urjit Patel who was also present at the event for his “suggestion to explore this theme for a speech.”
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