The RBI can do better than this on the autonomy front
Instead of excluding the government and financial players in a show of independence, it should work with them
Is the Reserve Bank of India deputy governor, Viral Acharya, right in lashing out at the government? And is the catastrophic scenario he claims will be caused by continued alleged government interference in the RBI’s operations real?
It is a fact that under the leadership of governor, Urjit Patel, the RBI has continued a rather hawkish stance when it comes to interest rates. It missed the boat on interest rate reductions, which could have given a fillip to the economy and prepared it better for the upcoming volatility. There is also some concern in the government that the books of banks have deteriorated under the RBI’s watch, and that the blame for this is being passed on without adequate accountability. And there is some disquiet in the government that the RBI has not been able to communicate a credible strategy on the rupee to the market. The RBI, in its pursuit of autonomy and in an effort to showcase its independence from the government, is pursuing policies that will be detrimental to the country. There are four ways in which it can do better.
Work with, not in isolation from, stakeholders: It would mean that the RBI, instead of excluding the central government and play- ers in the financial sector in a show of independence, should work with them. A great central bank in a failed economy may work for the governor’s next posting, but does little for the economy.
Reforms work best when the economy is doing well: Whether it is our personal life, companies or the economy, changes are best made when there is a buffer to reduce the effect of temporary negative impact. Piling on pressure when the economy is sucking wind because of inadequate liquidity is illogical to the extent of being bizarre. Nobody questions the need to improve asset quality — but stopping banks from lending is not the answer. Now is the time to “nurse” the economy: dealing with the bad assets but also allowing good lending to continue.
Introspect and work with the powers already vested in it: How did the RBI audits fail in the case of the Punjab National Bank? How did it miss the crisis in IL&FS? Why is there general international investor discomfort with the lack of direction from the RBI?
Future-proof RBI: To deal with a complex new world, the RBI has to seriously consider breaking itself up to remove inherent conflicts of interest. The different sections could always work together — with each other and other stakeholders but need to be fundamentally distinct entities.
One could say that individualistic sprints are being run by short term appointees in the RBI, when the need of the hour is an inclusive approach that ensures development and broader positive market perception of India.