RBI Deputy Governor Viral Acharya calls for independence of central bank

Seeking independence for the central bank, RBI Deputy Governor Viral Acharya said that RBI is not a department of the executive function of the government.

Advocating for the independence of the Reserve Bank of India (RBI), Deputy Governor Viral Acharya said that the government may soon incur the wrath of the financial markets.

While speaking at the AD Shroff Memorial Lecture in Mumbai on Friday, he said,

“Governments that do not respect central bank independence will sooner or later incur the wrath of financial markets, ignite the economic fire, and come to rue the day they undermined an important regulatory institution”

The need to make the central bank an autonomous body is to make it more effective. It will allow the RBI to have a greater control over the regulations of Public Sector Banks (PSBs). Further, political interference over appointing prominent members could be avoided.

It all started after the Nirav Modi scam, which RBI Governor Urjit Patel said was caused by ‘weaker regulatory power’ over PSBs like Punjab National Bank.

The market plays a vital role in shaping the government and the central bank’s role. For instance, the government can be held responsible, and would even have to pay for the market’s transgressions.

As RBI comes under the hammer of the government, the market can make it remain accountable and independent.

He added the Reserve Bank is "statutorily limited in undertaking the full scope of actions such as asset divestiture, replacement of management and board, license revocation, and resolution actions such as mergers or sales - all of which it can and does deploy effectively in case of private banks.”

Sharing an anecdote supporting his statement on Government’s horizon on decision making with the T20 cricket match, Acharya said, “A central bank plays a Test match, trying to win each session, but importantly also survive it so as to have a chance to win the next session, and so on.”

Quoting the Reserve Bank Act, 1953 in addition with Banking Regulation Act, 1949 he stated that while the RBI has derived several important powers from the two acts, the effective independence with which these powers can be exercised in practice is important.

In a 2014 paper published by N. Nergiz Dincer and Barry Eichengreen from TED University, Ankara, and the University of California Berkeley in International Journal of Central Banking stated, RBI was listed as the least independent among 89 central banks surveyed.

Acharya said, “The central bank is an institution separate from the government and not a department of the executive function of the government.”