‘Governments play T-20, the central bank plays a test match’, Reserve Bank of India (RBI) deputy governor Viral Acharya on Friday used a cricket analogy to describe why there’s a need to ensure the independence of the regulator as government’s policies remain short-sighted due to elections. Acharya said that the market can discipline the government “not to erode central bank independence, and it can also make the government pay for its transgressions”.
Viral Acharya’s hard-hitting speech at AD Shroff Memorial Lecture, Mumbai has come amid a tug of war between going on between the RBI and the government over a range of issues especially in the context of the banking crisis. Recently, the Finance Ministry was reported to be putting pressure on the RBI to ease its Prompt Corrective Action (PCA) norms against PSU banks.
Here are top 5 quotes from Viral Acharya’s speech on the importance of RBI’s independence
Kiss of death – Incurring the wrath of markets
“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.”
T20 vs Test Match
“A government’s horizon of decision-making is rendered short, like the duration of a T20 match, by several considerations. As elections approach, delivering on proclaimed manifestos of the past acquires urgency; where manifestos cannot be delivered upon, populist alternatives need to be arranged with immediacy… In contrast, 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… Indeed, by their mandate central banks are committed to stabilise the economy over business and financial cycles…”
Undermining central bank’s independence
When governance of the central bank is undermined, it is unlikely to attract or be able to retain the brightest minds that thrive on the ability to debate freely, think independently, and effect change; attrition of central bank powers results in attrition of its human capital and deterioration of its efficiency and expertise over time
More powers needed to regulate PSUs
“Legislation should be amended to enable the RBI to extend all the powers currently exercised over private sector banks to PSBs; in particular, regarding Board member dismissals, mergers and license revocation. … It should also remove the option of an appeal to the government when the RBI revokes a license.”
Protecting RBI’s balance sheet: quoting former RBI deputy guv Rakesh Mohan
“It is also argued by some that the government can always recapitalise a central bank when necessary. This is certainly true in principle but is practically difficult when the government itself suffers from fiscal pressures and maintains a relatively high debt-GDP ratio, as is the case in India. What is also important is the erosion of central bank independence both in reality and perhaps, even more importantly, in optics…Once again, better sense has prevailed and the government has not raided the RBI’s balance sheet.”