Reserve Bank of India (RBI) official warned that “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”.
RBI Deputy Governor Viral Acharya said the market can discipline the government not to erode central bank independence, and it can also make the government pay for its transgressions. “Interestingly, the market also forces central banks to remain accountable and independent when it is under government pressure,” he said.
Delivering the A D Shroff Memorial Lecture in Mumbai Friday, Acharya listed three “important pockets of persistent weakness” in maintaining the independence of the RBI. One, its inability to undertake the full scope of actions against public sector banks vis-à-vis private banks; two, the discretion to retain reserves without having to transfer surpluses to the government; and, three, protecting its regulatory scope, a case in point being a recommendation to have a separate payment regulator bypassing RBI’s powers.
“I chose for today’s occasion the theme of the importance of independent regulatory institutions, and in particular, that of a central bank that is independent from an over-arching reach of the state,” Acharya said. “This theme is certainly one of great sensitivity but I contend it is of even greater importance to our economic prospects.”