Open rift between Indian central bank, govt as official warns of catastrophe

  • BRI official says govts that do not respect central bank independence will sooner or later incur the wrath of financial markets

MUMBAI: In a sign of a mounting policy struggle between India’s central bank and the government of Prime Minister Narendra Modi, a top bank official warned on Friday that undermining a central bank’s independence could be “potentially catastrophic”.

The comments by Reserve Bank of India (RBI) Deputy Governor Viral Acharya showed that the central bank is pushing back hard against government pressure to relax its policies and reduce its powers ahead of a general election due by next May, and as Indian financial markets have been dropping in recent weeks.

In a speech to top industrialists he cited the Argentine government’s meddling in its central bank’s affairs in 2010 as an example of what can go wrong. That led to an investor revolt and a surge in bond yields, badly hurting the South American nation’s economy.

“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.

He had three of his fellow deputy governors in the audience and also thanked RBI Governor Urjit Patel for his “suggestion to explore this theme for a speech”, in a show of unity from an institution typically known for its restraint.

Government officials have recently called for the RBI to relax its lending restrictions on some banks, and New Delhi has also been trying to trim the RBI’s regulatory powers by setting up a new regulator for the country’s payments system.

Acharya said more needed to be done to ensure effective independence for the central bank in its regulatory and supervisory powers.

“The risks of undermining the central bank’s independence are potentially catastrophic,” said Acharya, adding that rash moves could trigger a “crisis of confidence in capital markets that are tapped by governments and others in the economy.”

Finance Ministry spokesman DS Malik said on Saturday that he had read Acharya’s statement but declined to comment on it without consulting senior officials. Finance Minister Arun Jaitley was due to speak at a scheduled event in New Delhi later on Saturday, he added.

“There’s no chance to accept RBI’s demand to give it full freedom,” a government source said before Acharya’s speech on Friday. “It is also accountable to parliament like every institution.”

Government officials have also called for the central bank to ease its lending restrictions on some banks that have a low capital base.

The RBI has identified 11 such state-run banks that are barred from lending unless they shore up their capital base after a massive rise in bad debts on their balance sheets.

Last week, the RBI also published an unprecedented note expressing its opposition to the government’s moves to establish a separate regulator for the payments system, which is currently handled by the RBI as part of its functions related to banking regulations.


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