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RBI And Finance Ministry: A Tale Of Two Horizons

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Recently, the Reserve Bank of India (RBI) and the Finance Ministry face-off is reported widely in news media. Following intensive reporting, #GovtvsRBI hashtag emerged and started trending on Twitter. In this backdrop, a section of media is speculating that the RBI’s Governor Urjit patel  is going to step down amidst such difference over the policy issues.

In this backdrop, scholars, economists, politicos, and intellectuals are discussing furiously independence and autonomy of institutions. It is worthwhile to mention that institutions should work in tandem with the government’s priorities without compromising on the objectives. As we all know, the governments have five years to perform on their priorities where the ruling apparatus take several populist decisions to intact their vote bank. They think that all institutions in the geopolitical boundary of India should follow their agenda. On October 26, 2018, Dr. Viral V Acharya, Deputy Governor, Reserve Bank of India, delivered the A. D. Shroff Memorial Lecture in Mumbai under the title of On the Importance of Independent Regulatory Institutions – The Case of the Central Bank. Impact News is sharing a couple of selected paragraphs from his lecture:

Excerpts from Dr. Viral V Acharya, Deputy Governor, Reserve Bank of India. Lecture:

Government and the Central Bank – A Tale of Two Horizons

A central bank performs several important functions for the economy: it controls the money supply; sets the rate of interest on borrowing and lending money; manages the external sector including the exchange rate; supervises and regulates the financial sector, notably banks; it often regulates credit and foreign exchange markets; and, seeks to ensure financial stability, domestic as well as on the external front.

The world over, the central bank is set up as an institution separate from the government; put another way, it is not a department of the executive function of the government; its powers are enshrined as being separate through relevant legislation. Its tasks being somewhat complex and technical, central banks are ideally headed and manned by technocrats or field experts – typically economists, academics, commercial bankers, and occasionally private sector representatives, appointed by the government but not elected to the office. This architecture reflects the acceptance of the thesis that central banks should be allowed to exercise their powers independently.

Progressive Evolution in Restoring Independence of the Reserve Bank of India

While the Reserve Bank has always derived several important powers from the Reserve Bank Act, 1935 and the Banking Regulation Act, 1949, what matters is the effective independence with which these powers can be exercised in practice. Over time, great strides have been undertaken by successive governments at the behest of the central bank, several economists, and umpteen committee reports, to restore the operational independence of the Reserve Bank. I will touch upon three such areas of healthy progress.

As many parts of the world today await greater government respect for central bank independence, independent central bankers will remain undeterred. 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 international investors, and longer lifespans.

The above-mentioned lecture shed light on the ongoing tussle with the RBI and the concerned ministry. Here the finance minsitry is labelled as the governemnt. In the last couple of years, the RBI and the Finance Ministry differences widely reported. Interestingly, it is projected as the RBI versus the Government. Sadly, it’s sheer generalization. The RBI is an indispensable part of the government. In the democratic society, institutions integrity matters a lot it must be protected. But, the recent development in the banking sector is not a good sign of a sound banking regulatory mechanism.

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