RBI: ‘Undermining RBI’s independence can have a catastrophic impact’

The RBI has upped the ante on the central bank’s autonomy even as it warned that the regulator’s conservatism is essential for the long-term stability of the economy. Delivering the AD Shroff Memorial Lecture, RBI deputy governor Viral Acharya said undermining the RBI’s independence will have a “catastrophic” impact.

Using a cricket analogy, he said, “a government’s horizon of decisionmaking is rendered short, like the duration of a T20 match, while in contrast, the 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.”

Acharya’s frank talk follows the central bank’s unprecedented act of putting up its dissent against an amendment to the Payment and Settlements Systems Act that would take away the regulator’s powers over payments banks.

He also criticised the recent lobbying by NBFCs and mutual funds for a liberal liquidity window to ease the pressure on interest rates.

On ET NOW’s India Development Debate, experts discussed RBI’s unprecedented attack against government policies.

Here are the key takeaways:

PANEL VIEW

MYTHILI BHUSNURMATH
CONSULTING EDITOR, ET NOW

It is most unfortunate that the deputy governor of RBI has spoken out and in rather intemperate language at a juncture when the country is passing through some problems on the macro-economic front. Differences between the government and the Central Bank are not new but these are usually settled behind the scenes and when they spill out so openly in public it does no good for the country, it does no good for the central bank itself.

ANANTH NARAYAN
MONEY MARKET EXPERT

It’s extremely significant by every yardstick. I think what Viral Acharya is pointing out is that if you impinge upon our (RBI’s) independence, if you cross a certain red line, markets will punish you. So, it’s not what’s happening right now but he is actually warning what could happen going forward. It’s impossible to read the speech and not jump to the conclusion that the RBI is sending an extremely strong message to Delhi.

R GOPALAN
EX-SECY, DEPT OF ECONOMIC AFFAIRS


I believe that nowadays there is a practice that many of these speeches are seen by the governor before they are delivered. The points he has raised can’t be brushed aside. They have got to be debated. Unless debated, we don’t have solutions. I see some kind of tension building up between the finance ministry and RBI for some time. Probably, this is a manifestation of the tension. Liquidity is important from the government’s viewpoint. People have to trust and respect each other.