Reserve Bank of India Deputy Governor Viral Acharya on Friday said governments that do not respect a central bank’s independence sooner or later incur the wrath of financial markets.

Acharya said undermining a central bank’s independence was akin to committing a “self goal”. He made the remarks at the AD Shroff Memorial Lecture in Mumbai.

“What matters is the effective independence with which these powers (vested in the Acts governing the RBI or any central bank) can be exercised in practice,” he said. “Governments that do not respect central bank’s independence will sooner or later incur the wrath of financial markets, ignite economic fire and come to rue the day they undermined an important regulatory institution.”

He said if uncertainty grows and confidence in a central bank’s independence and credibility erodes “then markets rap bond yields and exchange rate on the knuckles”. “Wiser counterparts who invest in central bank independence will benefit through lower costs of borrowing, the love of international investors and longer life spans,” he added.

In recent months, the central bank and the government have differed on their approach to matters pertaining to payment systems regulator and Prompt Corrective Action norms for banks, PTI reported.

Acharya, during the course of his 85-minute-long speech, also spoke about “pockets of persistent weakness” in maintaining the RBI’s independence, including regulation of public sector banks where the central bank cannot effect management changes, balance sheet management, and “regulatory scope” like its ongoing tussle regarding the payment systems regulator.

The senior RBI official termed the central bank a friend of the government who will “tell unpleasant but brutally honest truths and correct, to the extent it can, any adverse long-term consequences of government policies”.

He said the central bank’s independence can be undermined through the appointment of government officials – rather than technocrats – to key positions such as governor, erosion of its powers through “piece-meal legislative amendments”, blocking of rule-based central bank policies and setting up of parallel regulatory agencies.

“Sweeping bank loan losses under the rug by compromising supervisory and regulatory standards can create a facade of financial stability in the short run, but inevitably cause the fragile deck of cards to fall in a heap at some point in future, likely with a greater taxpayer bill and loss of potential output,” he said, pointing to the more than Rs 10.50 lakh crore non-performing assets that the banking system is plagued with.