In a no-holds-barred speech, Deputy Governor of the Reserve Bank of India (RBI) – Dr. Viral Acharya, on Friday defended the need to protect independence with which the central bank is permitted to work, especially alongside the government, according to a CNBC-TV18 report.
The speech came in the backdrop of the RBI’s debate with the government to offer greater control over PSU banks, need to strengthen the RBI’s balance sheet instead of paying surplus as a dividend to the government and recent disagreement between the two regarding the RBI’s regulatory oversight on payment and settlement system.
In his speech, Dr Acharya, started with a quote from the former chief of Central Bank of Argentina (Martin Redrado), "My time at the central bank is up and that is why I have decided to leave my post definitively, with the satisfaction of my duty fulfilled. We have arrived at this situation because of the national government’s permanent trampling of institutions. Basically, I am defending two main concepts: the independence of the central bank in our decision-making process and that the reserves should be used for monetary and financial stability."
He went on to draw a cricketing analogy between the horizons with which central bank and the government work. He said governments work with the mindset of a T-20 cricket match (short format) because of the chain of elections and need to deliver on manifestos. On the other hand, central banks are designed to work in the test-match format (5-day match) with the willingness to compromise short-term gains for longer-term outcomes.
He highlighted that a perception about undermining of the central bank can not only lead to reduced confidence among financial market investors (especially foreign) but also can lead to systemic risks through a buildup of the shadow banking structure.
An area where he has commended the coordinated approach between the government and the central bank is the set-up of Monetary Policy Committee, which has been empowered adequately to target inflation within the legislatively defined band of +/- 2 percent to 4 percent level. He also highlighted that reduction in SLR (G-Sec holding requirement) as a positive and indicated scope for a further cut in line with Basel III Liquidity Coverage Ratio (LCR).
Towards the end, he discussed three main areas where there is a challenge in maintaining independence of RBI vis-a-vis the government’s executive powers:
1. Regulation of Public Sector Banks: This is an ongoing debate between the RBI and the government whereby the former seeks full scope of powers against erring public sector banks (PSUs) – such as asset sales, replacement of management and board, license revocation, and resolution actions such as mergers or sales –– all of which it can deploy in case of private banks.
2. Reserve Bank’s balance-sheet strength: Dr Acharya is seeking to defend the RBI’s balance sheet/ reserves against apparent plans of the government to monetise its assets. He quoted, “A thorny ongoing issue on this front has been that of the rules for surplus transfer from the Reserve Bank to the government."3. Regulatory Scope:
In this context, he pointed that while the government ought to divest the RBI of its regulatory powers over Payments & Settlement Systems, RBI has not only filed a dissent note but also made it public.