The fragile peace between the finance ministry and the central bank was ruptured on Friday when economic affairs secretary Subhash Chandra Garg took a pot shot at Reserve Bank of India (RBI) deputy governor Viral Acharya’s stern warning last week that governments that make incursion into central banks’ autonomous regulatory space would incur “wrath of the markets”.
The fragile peace between the finance ministry and the central bank was ruptured on Friday when economic affairs secretary Subhash Chandra Garg took a pot shot at Reserve Bank of India (RBI) deputy governor Viral Acharya’s stern warning last week that governments that make incursion into central banks’ autonomous regulatory space would incur “wrath of the markets”
By the evening, RBI deputy governor NS Vishwanathan had come back with his own ripsote, to explain why the regulator’s capital adequacy norms must not be diluted.
In a tweet, Garg said: “Rupee trading at less than 73 to a dollar, Brent crude below $73 a barrel, markets up by over 4% during the week and bond yields below 7.8%. Wrath of the markets?”
In response to the government saying CRAR (Capital to Risk Weighted Assets Ratio) norms were too high — higher than Basel norms — Vishwanathan said, “We
must guard against any push for dilution of standards in the name of aligning them with international benchmarks because that will be cherry-picking and will result in our banks being strong in a make-believe sense and not in reality.”On Wednesday, the finance ministry had said the government has “nurtured and respected” the central bank’s autonomy as an essential and accepted governance requirement, in remarks widely seen as the finance ministry’s willingness to make peace with the RBI. Even that statement was, however, not completely devoid of rancour.
The ministry reminded the RBI that it has never made public the details of consultations with the central bank and only final decisions have been communicated to the outer world. Meanwhile, the International Monetary Fund (IMF) has said it was monitoring the reported rift between the RBI and the finance ministry, and stressed its usual opposition to any move that compromises the independence of central banks anywhere in the world. When asked about the row, IMF director of communications Gerry Rice said: “Just stepping back, as a general principal, and we’ve said this before…that we support clear lines of responsibility and accountability.” “And, international best practice is that there should be no government or industry interference that compromises the independence of the central bank and financial supervisor.”
Making a case for more powers to the RBI, Acharya last Friday delivered a scathing speech on election-bound governments’ intrusion into the central banks’ autonomous space. A government’s horizon of decision-making is rendered short like a T20 match, he said, using a cricketing analogy. In contrast, “a central bank plays a Test match, trying to win each session, but importantly also survive it so as to have a chance to win the next session, and so on”, he added.
Acharya’s remarks came amid simmering tensions between the government and RBI over a government-panel proposal to have a payments regulator outside the central bank and the finance ministry’s attempt to get the RBI to agree to tweak its stringent corrective regime for weak banks as well as a circular on stressed asset resolution, especially for power players. The friction came to a boiling point when the finance ministry invoked a never-used Section 7 of the RBI Act to seek consultations with the central bank (although the government didn’t use the section to issue binding orders to make the RBI fall in line) on sticking points.
Differences on the assessment of a liquidity crunch after the IL&FS crisis, greater credit to MSMEs and a larger transfer of RBI surplus to the government also contributed to the row.
As reported by FE earlier, between the ministry and RBI could surface again when the RBI’s board meets next on November 19. The ministry will likely take up the contentious issues again.