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RBI Autonomy — With Accountability

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It is in the interest of the government and the nation to respect RBI’s functional autonomy, as happened at the last RBI board meeting. RBI autonomy came up when RBI governor Urjit Patel testified before Parliament’s standing committee on finance. It is important for all stakeholders to view and appreciate institutional autonomy 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. Even when 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. 
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. The government has to be mindful of that, even if not of sentiment within the central bank or the financial community. 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. The government should refrain from trying to transfer regulatory decisions from the RBI’s internal team to the executive board. The board can and should identify the concerns that RBI regulatory capacity should address, but not presume to tell RBI how to. 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. That is a good thing.
The Economics Times, 29th November 2018

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