RBI's autonomy an 'essential and accepted' governance requirement: Finance Ministry

31 October, 2018, 17:00 | Author: Frank Williams
  • Urjit Patel governor of the Reserve Bank of India at the spring meetings of the International Monetary Fund and World Bank in Washington D.C

It's not the first time that the Reserve Bank of India has had a run-in with the Centre, and it certainly won't be the last.

"The autonomy of the Central Bank, within the framework of the RBI Act, is an essential and accepted governance requirement". 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; their wiser counterparts who invest in central bank independence will enjoy lower costs of borrowing, the love of global investors, and longer life spans. Government officials were left unhappy with Archarya's speech.

Top sources indicated that the Central government played hardball and made things hard for the Central bank.

Slamming the government for reportedly referring to a never-used clause of the RBI Act directing the central bank to implement its wishes, former Union finance minister P Chidambaram on Wednesday alleged that the BJP dispensation is "hiding facts" about the economy and is desperate. Sources said after the consultation, RBI has to take directions from the government in "Public interest". "In particular, the central bank is not directly subject to political time pressures and the induced neglect of the future; by virtue of being nominated rather than elected, central bankers have horizons of decision-making that tend to be longer than that of governments, spanning election cycles or war periods", he added. It was a regulator of these. They also said RBI stand on technical issues is undisputed. On Wednesday, reports suggested that the government had floated the idea of invoking Section 7 of the RBI Act, which would allow it to give instructions to the central bank, albeit "in consultation with the Governor".

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Patel and his deputy governors are expected to meet top finance ministry officials on Friday.

But what caused Viral to make the comment? Three issues were raised through these consultations - Issues of the power sector, Prompt Corrective Action (PCA) and Medium and Small Scale Enterprises (MSME).

The statement comes amid reports of the government having issued directions to the RBI on issues such as easing lending norms to infuse liquidity in the system. While refusing to divulge the contents of the letter, Gurumurthy told The Economic Times that he had objected to "Acharya going public on issues not discussed in or disclosed to the board which met just two days earlier". "Regulators ultimately decide the rules of the game and regulators have to have a third-eye which is to be perpetually be open", Arun Jaitley had said in February.

"In case it really happens, there will be mayhem in the market because at this point of time we can't afford RBI Governor resigning". "But it is quite worrisome to see the government trying to continuously interfere into the RBI's operations".

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