Central bank warns political meddling may be ‘catastrophic’
Relations between the government and Reserve Bank of India continue to deteriorate as politicians push for regulatory rules on lending to be relaxed
Tensions between the Indian government and the central bank have spilled into the open, with a senior bank official warning that efforts to erode the institution’s independence were “potentially catastrophic”.
Deputy Governor Viral Acharya lashed out amid attempts by Prime Minister Narendra Modi’s government to trim the authority of the Reserve Bank of India (RBI) and weaken its regulatory oversight.
“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,” Acharya said in a speech to industrialists.
The government has said it will establish a separate regulator to oversee India’s payments system in what was seen as a lever for curbing the RBI’s authority. It is also pushing the central bank to relax lending restrictions imposed on 12 banks with low capital bases.
Mostly owned by the state, the banks have large amounts of bad debt and the RBI has demanded that they boost their capital reserves. The government, gathering support ahead of the general election due next May, says they should resume lending to help stressed sectors.
It has found backing from some non-official directors on the central bank’s board for Micro, Small and Medium Enterprises, including S Gurumurthy of Swadeshi Jagran Manch, a rightwing think tank.
However, the RBI contends that any relaxation of its rules would undermine efforts to improve the health of the banking sector. Apart from the lending restrictions, the affected banks also have limits on their branch expansion and distribution of dividends.
Acharya, who is close to RBI Governor Urjit Patel, warned that the government’s focus on short-term goals could harm the economy.
Modi is feeling heat from the impact of soaring global oil prices on the economy, a weakening currency and tightening credit
“The risks of undermining the central bank’s independence are potentially catastrophic,” he warned, adding that any rash moves could trigger a “crisis of confidence in capital markets that are tapped by governments and others in the economy”.
Using a cricketing analogy, Acharya compared the government’s “horizon of decision-making” to a T20 match (a game that lasts only a few hours), that had the elections and other objectives in mind. In contrast, the central bank’s approach was like that of a test match (spanning five days), with a focus on long-term economic stability.
The clash is the latest of many between the Modi government and the central bank, initially over interest rates and then the sensitive issue of regulatory jurisdiction, which the RBI sees as its exclusive domain.
Modi is feeling political heat from the impact of soaring global oil prices on the economy, a weakening currency and tightening credit, which have all contributed to a slump in stock market trading.
As he looks for a scapegoat, questions are being asked about the future of Urjit Patel, whose term as RBI Governor ends next September. It is unclear whether he will get an extension or even finish this term.
When Patel took over as governor in September 2016 he was seen as more docile and less articulate than his predecessor Raghuram Rajan; seeing an opening, the government demonetized the currency two months later, on November 8, by banning notes with high values.
Patel copped a lot of flak for surrendering the RBI’s authority, though it later became apparent that the entire exercise had been futile: nearly 99.3% of the banknotes were still redeemed with banks.
The RBI governor has been told to give a briefing on November 12 to a parliamentary panel on the subject of demonetization and its ramifications, after holding similar discussions with the panel in January and July last year.