Govt sees red over RBI making rift public

Government officials are very upset with the Reserve Bank of India (RBI) for publicly talking about a rift with the government, fearing it could tarnish the country’s image among investors, senior officials said on Monday.

On Friday, 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.

In a speech to top industrialists Acharya 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.

“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,” Acharya said. The officials declined to be identified because of the sensitivity of the subject.

One said that it was vital that what happened between the government in New Delhi and RBI in Mumbai was kept confidential. “The government respects the autonomy and independence of RBI but they must understand their responsibility,” the official said. A second official, based in Prime Minister’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 added. An RBI spokesman was not immediately available for comments.

Union bats for autonomy

The RBI employees association on Monday came out in support of the views, saying "undermining the central bank is a recipe for disaster" and government to stop nibbling at its autonomy. "We firmly hold that undermining the central bank is a recipe for disaster and government must desist," All India Reserve Bank Association said. The association said Acharya's comments about government's interventionist role vis-a-vis the RBI has created a flutter across the nation.