Saturday, 18 January 2020

RBI Public Flogging The Government A Tale Poor in Taste

Updated: December 13, 2018 11:38 am

 On October 26th RBI Deputy Governor Viral V Acharya equated government’seconomic policies to a short format cricket match, whilst delivering at A. D. Shroff Memorial Lecture in Mumbai. This is not the first and will not be the last as far as standoff between Institutions and Sovereign Government is concerned. However the pertinent question of Central Bank Autonomy his lecture ignited at such larger scale is unique in India. Issue has been central point of discussion in Print & Electronic Media, Social Media, Academia, Flagbearer of Democracy, Leftist, Rightist and everybody in between and around Whilst making his points he draws example from Various Central Bankers, Noble Laurits and Eminent Economist. When we try to get under the skin of his acquisition, we see that he is primarily concerned with couple of things which he assumes are raiding the centrality of RBI in conducting itself efficiently and challenging its autonomy. These are (i) Proposition to Withdraw Reserve Bank’s Reserve by the Government may be catastrophic as it happened in the past in Argentinaand may erode Government Credibility(ii) Imposed Limitations in Regulation of Public Sector Banks where RBI cannot act against PSU Banks in terms of asset divestiture, replacement of management and Board, license revocation, and resolution actions such as mergers or sales whereas as all of which it can and does effectively in case of private banks and (iii) Curtailing Regulatory Scope by hiving central bank’s powers over payment and settlement systems by appointing a separate payments regulator (iv) Not letting RBI getting too tough on the lending Institution

When Mr Acharya creates a context where the credibility of the Nations are only dependent on the Independence of Central Banks, does he give a thought to explain the success of China in attracting the Foreign Corporates and massive Foreign Funds despite having a non-autonomous Central Bank. As we are all aware that in Chinese Financial System, Government controls all the institutions and they all work in tandem with the Strategic Sovereign Interest. Policies are opaque and questioning their rationale is prohibited. I am sure Mr Acharya is clueless about the reasons of financial success of countries where Central Banks credibility is questionable On the Contrary side What about the US Financial crises of 2008, where Central Bank was totally autonomous. Its autonomy created a huge monetary supply and complex Financial Instruments which led to the collapse of Financial Market. Post crises it flooded the market with supply of Trillions of Dollar to save the Commercial Interest of Private Banks at expense of Taxpayers Money

If we see in Indian context, many of the NBFC and Commercial banks are hitting the rocks. They are posing the systemic crises of Liquidity, Corruption, and Conflict of Interest at the apex level. With the IL&FS and DHFL crises we are beginning to see the new depth of crises. Basis question we need to ponder is why such a situation arose. There may be many reasons to it but the something at the core is that Reserve Bank of India failed to live up to its core regulatory functions. It failed to monitor the functioning of Systematic Important Financial Institution like IL&FS and PNB where rot was brewing

 

The Core function of any elected Government is to create social & economic environment which facilitates setting up of Industries & Infrastructure, Job creation for youth, social security for its citizen. One of the factors through which this is achieved is by creating multiplier effect through churning domestic money supply and inviting foreign funds to tap domestic opportunities. And we need to remember that India needs a huge lot of Money (which is possible by creating bigger economy and higher GDP) for defending its sovereignty as it is uniquely surrounded by twin hostile state of China and Pakistan

All these factors in totality made Government to think if its necessary to give directives to Central Bank as their so called autonomous structure has failed to achieve their strategic objectives. Hence Government demanded to transfer the RBI reserve as the excess reserve will be used in Government Schemes for creating the demand at the bottom of Pyramid and also facilitating PCA framework so that banks can start functioning with necessary precautions. RBI in the past has failed to enable the monetary supply at the bottom of Pyramid and facilitate credit opportunities at rural areasfor accelerating economic growth

In reality the credibility of Central Bank is determined by the credibility of Government and not vice versa. India is continually growing @7% despite the declining growth of bigger economies. India’s Sovereign rating is low but it is still attracting/raising funds at lower rates. Can Mr Acharya explain this dichotomy, simply no because he does not understand that Market is shrewd and it considers the bankable opportunities and the Credibility of government in safeguarding its interest. India has a very credible, strong and committed government under the able leadership of Mr Modi and market acknowledges this fact. Many of the big market leaders might not know the names of Governor and Deputy Governor of RBI and what they do in their isolated chambers. Market knows the democratically elected Government of Mr Modi and its effort in creating suitable economic climate under its flagship schemes like Make in India etc.

Mr Acharya does not have the prior experience of important office in any Central Bank and his open lashing to Government in public was not only poor in taste but also factually unsubstantiated. It sounded more a resentment of an underage kid to drive the car independently of Dad without Driving Licence in place.      

 

By Shobhit Sinha

 

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