The International Monetary Fund said on Thursday that it is monitoring the rift between the government and the Reserve Bank of India. The statement came days after reports claimed the government was undermining the central bank’s authority.
“We’re monitoring the development on that issue and will continue to do so,” IMF Director of Communications Gerry Rice said, according to PTI. He added that the world body is against government interference in central banks.
“I’ve said this before standing here that we support clear lines of responsibility and accountability,” Rice said. “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.” He added that the IMF held the same position, that central banks should be independent of government interference “in the context of a number of countries”.
The row between the Centre and the RBI became public on October 26, when the central bank’s Deputy Governor Viral Acharya said that eroding the independence of central banks will ignite “economic fire”.
Governments that do not respect central bank independence will sooner or later incur the wrath of financial markets, he had said. Government officials had recently called for the RBI to relax lending restrictions on some banks. The RBI also opposed a suggestion by the government’s inter-ministerial committee to set up an independent regulator for payment systems.
Three days after the speech, Reuters reported that the Centre is upset with the central bank for publicly talking about the rift. Senior officials said the government fears the rift could tarnish the country’s image among investors. An unidentified official in the Prime Minister’s Office told Reuters it was “very unfortunate” that RBI took the matters public. The official said Patel may face a tough time when he appears before a parliamentary standing committee on November 12.
On Tuesday, Finance Minister Arun Jaitley said the central bank had “looked the other way” when banks were lending “indiscriminately” between 2008 and 2014. The government is also reportedly unhappy with the bank for not cutting interest rates and raising them instead.
The next day, reports had claimed that the government had initiated talks with the central bank to invoke Section 7 of the Reserve Bank of India Act, which could empower it to issue directions to the central bank on certain matters. This was seen as an escalation of the tussle between the government and the RBI. Later that day, the Finance Ministry issued a statement in support of the central bank’s autonomy. It did not comment on the reports but said the autonomy of the central bank is an essential governance requirement. “Both the government and the central bank have to be guided by public interest and requirements of the Indian economy,” the ministry said.