Protect new-found trust: Former central bankers

NEW DELHI: The truce between the government and the Reserve Bank of India (RBI) augurs well for the economy and investors, but care is needed to build on the new-found trust between the two entities, former central bank governors and influential policymakers have told TOI. Some central bankers expressed relief that both sides are open to compromise and the never-used Section 7 is off the table.

Most of them agreed that the spat was avoidable. A former central bank governor said deputy governor Viral Acharya’s speech attacking the government was unnecessary, adding that there would be a period of painful adjustment after the patch-up. Another former RBI governor said the government will have to avoid committing the mistake of referring to the RBI only as a regulator when it is also the creator of money. “I think they have come to a reasonable understanding after a public spat. They could have come to an understanding earlier without the public display of acrimony,” he said, adding that both sides appeared to have made “reasonable compromises”.

Protect new-found trust: Former central bankers

The verdict on whether the RBI has suffered a dent to its autonomy seemed to be split with some saying that it has taken a knock while others were of the view that the government has been able to restore a balance in the relationship through a reboot in ties within the board. “I don’t think so,” a former RBI governor said when asked whether RBI’s autonomy had been diluted in any way. “If you look at Monday’s statement, it uses the word ‘on the board’s advice’. Even earlier boards advised the RBI. Some 15 years ago, the Bank Rate (an earlier benchmark for loans) had to be approved by the board,” he added.

Another former central bank governor said while there is a compromise on substantive issues, the board had now come into the picture. He said earlier it was essentially between the governor and the government, and now the board has started taking instructions from the Centre. “In that sense, there is interjection,” he said.

Former finance minister P Chidambaram said the government has stepped back and grudgingly acknowledged the independence of the RBI. “My guess is that the independent directors (at least most of them) realised that the government was on a perilous course and refused to go beyond giving advice,” he said in a series of tweets. Chidambaram also saw no harm in a technical panel examining the issue of RBI reserves.

A former finance secretary recalled the differences that the ministry had with the RBI during his tenure in the late 1990s. “We had regular consultations and resolved the issues. The public spat was avoidable. How come independent directors are speaking in public and airing their views. This practice should be avoided,” he said.

Asked whether RBI’s autonomy has been hurt in anyway, he said, “The demonetisation decision was also taken by the board. Did anyone say that RBI was being driven by the board? It is ultimately the government which took the decision. So it will be wrong to say that now the RBI has become board-driven,” he said.

An influential former policymaker said that there was a need to distinguish between RBI’s role in monetary policy and exchange rate management on the one hand and regulation on the other. “There can be no compromise on its role in the former function. Its independence has to be absolute. There has to be a lot more consultation on regulation with the final decision resting with the RBI,” he said. On the issue of sharing reserves, he favoured the setting up of an entity on the lines of the finance commission. “The formulae will need to err on the side of the RBI since it does need enough resources in the eyes of market participants to defend the exchange rate.”

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