Indian central bank plays long game

Viral Acharya, deputy governor of the Reserve Bank of India, uses a cricket analogy to describe differences between the goals of central banks and governments.

Politicians are in the hard-hitting 20-over game, wrapped up in less than a day, he says. Central bankers play the long form: Test cricket, which lasts five days. Governments want quick results, but central banks try to win each session “but also importantly to survive it so as to have a chance to win the next”.

In a polemical speech, this was a genteel way of framing an increasingly acrimonious standoff between Prime Minister Narendra Modi’s government and the Reserve Bank of India. For India much is at stake. Ahead of the 2019 general election, Modi’s administration is pushing for access to central bank reserves to shore up its own finances and step up spending. It is also pressing the Reserve Bank of India to loosen monetary policy and pump liquidity into fragile banks and nonbank financial companies. In the long-term interests of financial stability, the Reserve Bank of India is rightly resisting.

The examples of Turkey, Nigeria and SA are salutary. When Turkish President Recep Tayyip Erdogan tried to wrest control of the central bank, he helped precipitate financial meltdown. In Nigeria the hard-won reputation of the central bank was squandered in weeks when the government replaced a highly regarded governor with a more pliant successor. SA is a good counterexample. Its Reserve Bank resisted the corrosion of the state under former president Jacob Zuma. SA is in better shape for it.

Regulatory and structural problems abound in India’s financial sector, as well as a legacy of bad loans. But this will not be resolved by compromising central bank independence. Doing so would introduce crash-bang-wallop T20 tactics to Test cricket. It might work for one session. Ultimately, India would be the loser. /London, November 5