Open rift between Indian central bank, Government as official warns of catastrophe

MUMBAI (Reuters): In a sign of a mounting policy struggle between India’s central bank and the Government of Prime Minister Narendra Modi, a top bank official warned on Friday that undermining a central bank’s independence could be “potentially catastrophic”.

The comments by Reserve Bank of India (RBI) Deputy Governor Viral Acharya showed that the central bank is pushing back hard against Government pressure to relax its policies and reduce its powers ahead of a General election due by next May, and as Indian financial markets have been dropping in recent weeks.

In a speech to top industrialists he cited the Argentine Government’s meddling in its central bank’s affairs in 2010 as an example of what can go wrong. That led to an investor revolt and a surge in bond yields, badly hurting the South American nation’s economy.

“Governments that do not respect central bank 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,” Acharya said.

He had three of his fellow deputy governors in the audience and also thanked RBI Governor Urjit Patel for his “suggestion to explore this theme for a speech”, in a show of unity from an institution typically known for its restraint.

Government officials have recently called for the RBI to relax its lending restrictions on some banks, and New Delhi has also been trying to trim the RBI’s regulatory powers by setting up a new regulator for the country’s payments system.

Acharya said more needed to be done to ensure effective independence for the central bank in its regulatory and supervisory powers.