Independence and accountability (The public clash between RBI and Government)

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Independence and accountability (The public clash between RBI and Government)

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• Monetary-Fiscal coordination: The RBI and government are supposed to build a coordinated approach towards managing the economy. But as on date, they are in a very public clash of opinions. CONCEPT
• Independence of Central Bank: Two decades ago, the idea of Central Banks’ independence in “functional” terms began to germinate. The govts. would allow Central Banks to function without any control. But independence wasn’t supposed to mean “goal” independence. [This was a global debate]
• Goals of the Central Banks: These were to be decided by the Governments. In ten years of debate, it was decided that Central Banks would focus only on inflation control, and not on employment generation simultaneously.
• A Western focus: While the debate was driven by the West, and accepted by Indian govt. and RBI also, the US as always maintained American exceptionalism, and tasked the Federal Reserve with both maximising employment while keeping prices stable. In India, by law since 2015, RBI was mandated to focus on inflation targeting alone.
• The present-day issues: These are 4 – 

1. Corrective Action on stressed banks, 
2. Prudential norms for FIs, 
3. Easing of liquidity, and 
4. Sharing of surplus generated by RBI. In the first 3 cases, the RBI can indeed speak, but legally speaking, the surplus generated belongs to the government of India.

• Importance of the surplus: The size of risks in the financial system should decide how much should remain with the RBI.
• No interference in functioning: Since the govt. has appointed the Governor, had a say in appointing the deputies, has appointed independent directors on the Board, now it should step back and let RBI function.
• Dangerous requests: If the RBI is forced by GoI to relax the prudential lending norms for Banks, it can create new risks. To ease credit flow for MSMEs post the DeMo-induced slowdown, the tool of choice should be interest rate subvention and not lowered lending norms. The RBI is correct in resisting this action.
• Monetary policy hasn’t done well: If we assess the one area the RBI has exclusive control on – monetary policy setting – we see that over 2013-2018 there’s a 5% point swing in real interest rate, much more than China’s. This is due to exclusive focus on inflation targeting. It has led to slow exports growth, due to real appreciation of INR. So independence is not growth 
• What about jobs? Absence of inflation helps those who are in jobs, not the jobless. Both RBI and GoI agree on keeping inflation low to not harm the poor’s incomes, but low inflation target leads to policies that can restrict investments, thereby restricting jobs. High rates directly affect manufacturing, and jobs.
• Time for a new monetary policy: High interest rates, high CAD and low employment generation tell us it’s time for change.
• Summary - In the debate over RBI’s independence, we must also assess how useful or useless the exclusive focus on inflation targeting has been, in a nation where jobs generation should also be a key focus area.

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