RBI versus Government: The Battle Gets Bitter

Days after RBI Deputy Governor Viral Acharya publicly spoke about the tussle between the government and the Reserve Bank of India, the Centre is reportedly upset about the rift being out in open. Senior officials who spoke to news agency Reuters told the government fears it could tarnish the country’s image among investors.

On Friday night, the RBI Deputy Governor Viral Acharya warned that undermining a central bank’s independence could be “potentially catastrophic”, in an indication that it is pushing back hard against government pressure to relax its policies and reduce its powers.

Delivering the A D Shroff Memorial Lecture in Mumbai, Acharya said 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.” 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 a surge in bond yields that badly hurt the South American economy.

The government officials, who did not wish to be named, said the Centre wanted to keep things confidential. An official, based in Prime Minister Narendra Modi’s office, said it was “very unfortunate” that the RBI took the matters public.

“The government is very upset. It was not expected from the RBI,” the official told Reuters. “The government respects the autonomy and independence of the RBI but they must understand their responsibility,” a second official said. An RBI spokesman was not immediately available for comments after business hours.

The RBI-government rift comes after the government’s demand that RBI eases its lending restrictions on banks that have a low capital base and a massive rise in bad debts. Another contentious issue is the control over interest rates.

While the Central bank wants sole authority over raising or lowering the interest rates, the government is unhappy over the bank decisions. 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.

The officials are also irked that Acharya made the remarks while Prime Minister Modi was about to head to Japan for the 13th India Japan Summit and talks with counterpart Shinzo Abe, a source said. Finance ministry officials remained largely silent in response to the speech at the weekend, as they didn’t want to aggravate the issue when Modi and top officials were in Japan, this official said.