Boss' message: On Wednesday, there was high speculation about Reserve Bank of India governor Urjit Patel's future plans because of the central bank's tension with the government. The finance minister, however, later acknowledged RBI's autonomy but also reminded it about its obligation to 'national interest'.
RBI governor Urjit Patel has called a meeting of its board on November 19 + . The development indicates that the likelihood of Patel resigning, at least in the next fortnight, has reduced.
Yes bank: Reserve Bank of India is not as independent as it is made out to be. The Centre has special powers to direct the central bank to follow its orders (under Section 7 of the RBI Act). The power has always existed before but was never used, until now. If RBI can listen to the Centre once, why can't it function on its orders always? There won't be any disagreements and both RBI and the Centre would be happy. Right? Not quite. There's a reason why most of the world’s central banks try to take decisions without political influence.
Read also: RBI vs government — 10 flash points between Centre and central bank
The mandate: Central banks control the country's currency, money supply and interest rates while also overseeing the country's banking sector (including managing financial crises from time to time). RBI's more focussed primary role is keeping inflation in check.
Creator vs spender: Central banks can create reserves or money. Governments have the mandate of spending and earning (through taxation) and borrow if there's a shortfall. An independent central bank ensures that the spender of money (government) doesn't have the power to create it too or dip into reserves at will. This is also meant to act as a constraint on government spending.
Long-term vs short-term: Like RBI deputy governor highlighted in his, now controversial, speech: governments tend to play T20 (think of their short-term political interest) while RBI plays a Test match (thinks of the long-term impact of monetary policy on the country). A politically compromised central bank would find it difficult, for instance, to raise interest rates, which is more likely to be politically unpopular. However, keeping interest rates low lead to higher inflation, which is not good for people. A shield from day-to-day politics helps it set long-term goals and take unpopular decisions to get there. It's the pulls and pressures of government's short-term requirement (elections) that is one of the reasons for the current tussle, say some experts. The government of the day has a lot to gain from an unexpected monetary boost that can at least temporarily stimulate economic activity.
Money and politics: It's not that central banks are totally unaffected by politics. Governments can (and do) exert pressure through appointments to the bank's board. Pressure also mounts from various quarters (in the form of criticism) if central bankers make mistakes or are seen to have made mistakes.
Not just India: Central banks have been under attack in many countries, especially after the 2008 financial crisis. While Donald Trump is critical of US Fed, Recep Tayyip Erdogan thinks the Turkish central bank isn't doing enough to lower borrowing costs. Central banks in Russia, South Africa and Thailand have also been under political pressure in recent years.
from Times of India https://ift.tt/2P30Tdn
