At loggerheads

Given the always simmering tension between the North Block and Mint Street, the content of RBI Deputy Governor Viral Acharya’s recent speech at a memorial lecture, making an oft-argued case for central bank autonomy, should surprise no one. But it is the tone and tenor of this speech, which contained a thinly veiled warning on the consequences of the Centre’s interference in RBI’s workings, that is alarming. That RBI has chosen to air this dirty linen in public, hints at a complete breakdown of communication channels between the government and the central bank. This undermines investor confidence and strengthens fears about institutional erosion when India is already experiencing economic turmoil.

Multiple flashpoints between the RBI and the Centre seem to have precipitated this outburst. RBI’s key grievance appears to be on the government’s frequent attempts to encroach on its turf. This is quite valid, given its suo motu proposal to regulate payment systems (which is RBI’s remit), its decision to appoint non-technocrats to the RBI Board and its insistence on easing prudential norms for MUDRA and SME lending. With domestic banks just halfway through the process of resolving their mountain of NPAs from large corporates, it would be imprudent to ratchet up SME loans without toning up their credit appraisal systems first. Demands to relax Prompt Corrective Action rules for public sector banks and draw down RBI’s reserves to pay higher dividends, are fraught with risks to financial stability. But while the RBI is correct to speak up when the Centre micro-manages it on operational matters, it is not quite kosher for it to cry wolf every time there’s demand for greater accountability from an elected government. When questioned on regulatory gaps that led to bank NPAs and frauds, the RBI argues that it lacks powers to replace managements or revoke licenses of PSBs. But it is a moot point how effectively it has used its existing supervisory powers, to plug process gaps in banks or head off evergreening of loans. The warning that the Centre will invite the ‘wrath of the market’, if seen to curtail RBI autonomy, is overdone. Of late, financial markets have been spooked not by government interference in RBI, but by the RBI’s poor communication on critical issues such as the NBFC liquidity crisis and the sliding rupee.

The Centre and the RBI should waste no further time in public sparring, and get back to the negotiating table. On issues of operational autonomy, the NDA regime needs to lay off its pressure on the RBI. On macro issues such as exchange rate management and RBI’s dividend policy, written agreements that clearly demarcate roles and responsibilities can be thrashed out. The Monetary Policy Framework Agreement and the FRBM Act are good illustrations of how a mutually agreed rule-based framework can broker peace between the central bank and the executive arm of government.

COMMENT NOW