RBI can’t claim complete autonomy: PMEAC’s Bibek Debroy
RBI is not truly, truly independent—no central bank is; in India, the monetary policy is not completely delinked from fiscal policy, says PMEAC chairman Bibek Debroy
New Delhi: The finance ministry, displeased with the Reserve Bank of India (RBI) for going public with its criticism of the government, has got the backing of the Economic Advisory Council to the Prime Minister (PMEAC) in driving home the point that the central bank’s autonomy has limits. Bibek Debroy, chairman of the six-member PMEAC, said in an interview that the central bank could not claim absolute autonomy.
Debroy’s comments come a day after the ministry signalled that its exchanges with the central bank better remain private and asserted that it would continue to give its assessment and suggest solutions to the central bank on matters of the economy.
“RBI is not truly, truly independent. No central bank is. In our system, the monetary policy is not completely delinked from fiscal policy,” Debroy said. The PMEAC chairman cited the comment of former central bank governor Y.V. Reddy in his autobiography Advice and Dissent that RBI is independent but within the limits set by the government.
“There have been differences between RBI and the finance ministry in the past. It is understandable. But yes, I do not think those differences need to be articulated in the public domain. There are enough mechanisms within the government system to resolve these,” Debroy said in an interview about a collection of essays by 58 authors titled Making of New India. Debroy is one of the three editors of the collection and has authored a paper on the government’s agenda to reduce corruption. The PMEAC chief, however, said there was nothing that indicated the external situation pointed to anything remotely close to a crisis.
A query emailed to RBI on Thursday remained unanswered till press time.
Debroy’s endorsement gives the finance ministry a shot in the arm in its assertion of rules of engagement with RBI. Experts concurred with the view that RBI autonomy does have its limits. “RBI’s independence cannot be absolute,” said former chief statistician of India Pronab Sen. “RBI is exercising government’s powers. The central bank is not created outside of the government by the Constitution. It has to be treated as part of the government. Any exercise of delegated power has its limits.”
Sen said the November 2016 demonetisation of high-value currency notes was an instance when questions about how far the government could push the envelope in its engagement with RBI should have appropriately been raised. “RBI was not even consulted (regarding demonetisation). An executive order was issued. End of story,” said Sen, describing how demonetisation was executed.
Differences between the central bank and the ministry have historically been on financial sector regulation, allowing entry of new instruments, restricting end use of foreign fund inflows, foreign borrowing caps and about setting key policy rates.
Relations between the two have become frosty in recent weeks after the government held out the threat of invoking Section 7 of The Reserve Bank of India Act, 1934. Under this provision, if the Union government so wishes, it can, in exceptional circumstances, overrule RBI. The ministry is keen that the central bank take steps to improve liquidity in the system, including by easing lending restrictions on certain public sector banks. RBI, however, is not much in favour. It used a speech by its deputy governor, Viral Acharya, to articulate its objections in public last week.
The government does not want the differences it has with RBI to be aired in public, as it has other battles to fight—widening current account deficit, rupee depreciation, tariff hikes by the US on imports from India, high oil prices and a crisis at the apex investigation agency, the Central Bureau of Investigation (CBI).