RBI & It’s Autonomy

General Studies- 3 – Indian Economy and issues relating to planning, mobilization of resources, growth, development and employment.

Background –

  • The government and the RBI are speaking alien languages on the state and direction of Indian economy. On October 26, RBI deputy governor Viral Acharya virtually accused the government of interfering with the working of the central bank. On the other hand, Union Finance Minister Arun Jaitely blamed the RBI for unmanageable figures of stressed assets saying that it failed to check indiscriminate lending between 2008 and 2014 causing NPA crisis in the banking industry.
  • The government wants the RBI to cut interest rates. It considers this as a necessity to give the much-needed impetus to the Indian economy; but the RBI has a different view on the matter.
  • A new 180-day deadline was set for declaring a loan as AN NPA. RBI said that after 180 days, the stressed account must go to the bankruptcy courts for settlement. The government considered the new regulations as very harsh that left public sector banks in the red. Recently, total 11 banks out of 21 and under RBI radar in terms of the NPA accounts.
  • Nachiket Mor was removed from the RBI board two years ahead of his tenure. The RBI says that he was removed without tending to the courtesy of informing him. It was considered to be an attempt on part of the government to shut the voice of the opposition from the RBI.

Facts and Current Happenings – 

  1. A meeting between the Parliamentary Panel on Finance and the RBI Governor was concluded recently in the month of November. There, Mr. Patel made a presentation on the impact of demonetisation and the status of non-performing assets in the banking sector
  1. Mr Patel assured the Committee headed by Congress MP M. Veerappa Moily that he would submit written answers to all the questions posed by members at the meeting and also will address the concerns over the tussle between the Government and the RBI. Also, given the large number of questions, the Governor was asked to file written replies in 10-15 days to answer all of them.
  1. The governor, stressed about 3 key points during the deliberations: –  
  1. Depositor’s interests were of primary importance for which autonomy was non-negotiable.
  2. Monetary policy should be the exclusive domain of the RBI. it is only the experts and technocrats who should have a say in the country’s monetary policy. There would be a direct conflict of interest if any other committee is given say in the matter.
  3. Maintaining the central banks’ reserves was extremely essential to maintaining the country’s AAA rating.

Governor Urjit Patel On Basel III

  1. He also mentioned the need to comply with the Basel III norms as what was committed in the G20 meet.

Basel III (or the Third Basel Accord or Basel Standards) is a global, voluntary regulatory framework on bank on capital adequacy, stress testing and market liquidity risk. Basel III came to the fore on the background of financial crisis of 2007-08.

Need for the autonomy –

  1. It is important for all stakeholders to view and appreciate institutional autonomy of the RBI in the right spirit. When the financial crisis struck in 2008, central bank autonomy, whether statutory or traditional, did not come in the way of governments, central banks and regulators of companies, insurance and stock markets working together to bail out banks, insurers and large companies, in several mature economies.
  1. Even when the crisis is absent, the interconnected global economy, with its ability to send trillions of dollars of liquidity sloshing this unpredictable way or that, makes constant consultation and cooperation among the multiple nodes of fiscal and regulatory decision-making essential. Here, RBI plays a major role being an autonomous institution.
  1. India has a partially open capital account, and large amounts of foreign capital in the debt market. A perception that the government is forcing the central bank to suspend prudential norms for short-term gains would produce a flight of capital that would send yields spiking. That would mean leaving to the governor and his executive team all core regulatory decisions, such as how much liquidity the system needs, how much capital banks should have and how to nurse impaired banks back to health.

Concerns over RBI’s autonomy – 

  1. The RBI, has not been able to contain increasing trends of NPAs (Non-Performing Assets). The current NPAs of India are measuring over 10 lakh crores and they will continue with the rising trend.
  1. The stringent interest rate policy is discouraging the investments in the developmental and infrastructure projects, hindering the government’s optimist policy to develop and grow.
  1. Key policies and commitments of the government need the backing and implicit consent of RBI, whereas differences emerged, defeat the ultimate purpose and output of the policy. Eg. The decision of demonetising the currency was taken by the government with an intent to reduce the quantum of Black Money stored and flushing out of India, whereas the predecessor of the current RBI Governor was not in support of this move. 

Third Basel Accord

Lakshya Ahead (Solution/Way Forward/Roadmap) –  

  1. Integrated approach in the policy making is necessary to accomplish the financial targets set broadly. Nexus between the broad objectives of the monetary and fiscal policy is essential, maintaining the jurisdiction and autonomy of the institutions.
  1. Transparency is to be maintained in the appointments of the central board of RBI. Justified reasoning must be provided in the entire process of appointment by the Government of India and the consent of the key authorities of RBI must be taken into keep consideration.
  1. The system of RBI testifying to a committee of parliament is healthy, as it brings greater accountability to both RBI and the government. Neither government spin nor RBI self-righteousness can deceive the markets as to autonomy’s well-being.

Q. Nexus between RBI and the Government of India is essential to strengthen the financial health of the economy. Critically Analyse. (250 words)

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