Viral Acharya, has given two ‘strong’ speeches over a short period of time. Commentaries following Acharya’s remarks can be classified in two broad categories.
First, those critiquing RBI senior staff’s apparent loquaciousness, on the grounds that central banks should always maintain dignified silence, and also accept the reality that, ultimately, it’s the elected GoI that decides the major rules of the game.
Second, those praising Acharya’s observations as a timely notice that GoI must not erode RBI’s hard-earned independence and that further, the Centre must cease and desist from its recent efforts to publicly ‘tell’ the central bank what it should do.
There are merits in both sets of arguments. But both probably miss a larger, and the systemically most important, point: it’s alright for RBI to occasionally publicly express its reservations about GoI, and it’s equally alright for GoI to sometimes publicly critique RBI.
Indeed, Acharya’s comments and subsequent responses from government high functionaries should be welcomed as a long-delayed first step in making Centre-central bank relations more mature and less mysterious. That’s what is required in a big democracy hosting a big economy, which is facing increasing policy complexity.
We now know, with considerable clarity, that GoI reckons RBI should do more to increase credit to industry; that RBI reckons GoI should junk the proposal to create another payments regulator; that RBI thinks it doesn’t have enough powers to supervise banks and, therefore, has been unfairly critiqued by the Centre; and that GoI argues RBI has failed to detect bank scams despite wide-ranging supervisory control enjoyed by the central bank.
We also know, with less but still credible certainty, that RBI is unhappy with some of GoI’s nominees to its board and that GoI isn’t overmuch concerned about RBI’s unhappiness.
The value of these facts, likely facts and insights being in the public domain is immense. It allows all relevant economic and financial players to have a better understanding of how two big policymakers, India’s fiscal and monetary masters, view their priorities.
India Not a Turkey
For example, economic, financial actors invested in macroeconomic stability know that even if election pressures make GoI keen to cut a few corners in the short term, RBI is unlikely to budge from its medium-terms goals. Similarly, those invested in keeping India’s banking and non-banking financial institutions in good health know that GoI will use some of its vast powers in emergencies, even if RBI appears to dither.
Compare this relatively higher degree of transparency in India’s Centre central bank relations to what happened in another major emerging economy, Turkey. An overbearing, near-dictatorial Turkish government pretty much press-ganged the country’s central bank into supporting a boom that’s now gone bust, with awful consequences.
There’s no question of Turkish central bankers publicly questioning the government’s policy, and, therefore, no question of building up an informed public opinion against economically and financially dangerous government interference.
Also instructive is another comparison, this time with a functioning democracy, the US. President Donald Trump has been harangued by his domestic critics for disparaging the chairman of Federal Reserve. Leaving Trump’s language aside, what’s wrong with his statements against Fed’s interest rate hikes? Fed, long used to effective policy independence from the executive, has vast powers and there are valid questions both about its recent record in inflation-targeting as well as its ability to read dangers hidden inside another asset bubble.
Trump may sound like a whining bully, but his carping about Fed puts the powerful US monetary authority squarely in public focus just as its policy impact — the effect of planned interest rate hikes on growth and employment — is likely to be the sharpest. It’s worth remembering here that the US has a long and healthy tradition of policymakers critiquing each other, and that such critiques have engendered some of the most consequential policy amendments.
This is how it should be in India. Responsible senior officials from GoI and RBI should, if the context demands, make their differences over substantive policy questions public. And India’s policy commentariat should get used to it, and welcome it.
When GoI’s economic affairs secretary recently observed that some of RBI’s rules should be relaxed to allow greater credit flow to industry, there was much hand-wringing by Mint Street traditionalists, as if the senior bureaucrat had committed some major social faux pas. But the secretary should be complimented for making clear GoI’s current views on credit flows.
Bank of last retort
Similarly, when RBI governor Urjit Patel had publicly observed that the central bank doesn’t have enough powers to police commercial banks, those sympathetic to Raisina Hill had criticised, and even mildly mocked, him for his ‘outburst’. But it was no such thing. Patel was right in speaking out about what RBI thinks is a major problem.
RBI, in fact, has a bit of catching up to do. Mint Street bosses have not always been the best messengers of their own institution’s views, while Raisina Hill has always had government heavyweights, who are masters in the art of public messaging, as well as experts at briefing the media.
So, let there be, occasionally, more heat in Government of India-Reserve Bank of India relations. It will throw more light on what’s most important for India.