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View: Why the RBI lawsuit can lead to more stress in the economy



US President Donald Trump "may regret" appointing Jerome Powell chairman of the US Federal Reserve. He answered questions about the growing tension between the US Federal Reserve and the US government regarding the interest rate policy of the Fed. Deputy Prime Minister Narendra Modi for Trump, Urjit Patel for Powell and Reserve Bank of India (RBI) for the US Federal Reserve, and there you have it. Following the speech by RBI Vice Governor Viral Acharya on Friday, GoI has to ruin the day he named Patel RBI governor.

Tensions between elected governments and non-elected central banks are not new. In the US, Trump was vocal and Powell, despite considerable provocation, restrained. In India it is the other way around. GoI, though more and more (and with some justification) dissatisfied with RBI, has not publicly expressed his displeasure. But that did not hold RBI back.

Another Bad Choice
The speech was possibly held by Deputy Governor Acharya. But it would be inconceivable if he had said what he did without Governor Patel's approval. Reading between the lines, it's almost as if Patel shoots off the back of the job in less than two years.

If Acharya had proposed a substantiated case for the independence of the central bank or had recently considered RBI to be somewhat volatile, posterity could judge him favorably. The case of an operational ̵

1; unlike the flat – autonomy was never in dispute. But with a barely concealed attack on GoI and the threat of market failure, with little regard for timing and context, Acharya has done a disservice not only to the RBI but also to the country.

To make the injury worse, he compared India to Argentina, a country that since its independence from Spain in 1818 has fallen back seven times on its international debts and five times on its domestic debt.

At a time when growing geopolitical tensions and impending US oil sanctions on Iran are threatening our already fragile foreign sector, as well as macroeconomic and financial stability, it is difficult to understand why Acharya was the catalyst for the consequences he warned , It would not be surprising if foreign investors would react if markets were opened today.
But let me come to details, the three main issues of Acharya, two of which are highly technical: RBI limited control of public banks (PSB), have to set up a separate payment regulator to protect their balance sheet and the proposal.

PSB has enough historical evidence that RBI does not suffer from power shortages. On the contrary, it enjoys much more influence with PSBs, as there is one representative on each board, and shotgun marriages to rescue troubled banks have all been imposed on public rather than private banks. The truth is that RBI representatives have little to show for their presence, private banks are not much better off than their public sector counterparts, and RBI has simply failed to break even in non-banking financial firms (NBFCs) to stop.

The plea of ​​inadequate powers against the PSB must be seen for what it is: an attempt to ward off criticism of sleeping at the station.

In the RBI, the picture is more complex. While it is undoubtedly important for RBI to have a strong balance sheet, a substantial part of the central bank's revenue comes from seigniorage – the difference between the face value and the cost of printing currencies.

RBI, Take Notes
It results directly from their sheet music and in many countries this is completely transferred to the government. Even if there are reasons to build up reserves, it also makes sense to set clear rules to determine how much should be transferred to the government and how much should be used to build up reserves.

For example, does RBI need such a large reserve for unforeseen expenses? Could it come instead from the same US Federal Reserve that came for Acharya's worship? After the Lehman Brothers crisis, the US Federal Reserve's action – "quantitative easing" – was nothing more than deficit financing. Even if things are not going so far, can RBI pursue a more nuanced, less confrontational approach to reserves?

On the way to establishing a separate payment regulator, this is only a draft proposal. Yes, the management of payment and settlement systems is a central responsibility of most central banks. But there are other models, especially in the US and Canada. In any case, the topic is so abstract that it would not be suitable for public debate and could have been resolved through discussions with the Ministry of Finance.

If only Acharya paid attention to former RBI governor YV Reddy. "There is no complete independence, RBI is independent, within the boundaries set by the government," Reddy said. It should be so. It is true that governments everywhere tend to shape their policies with a view to the next elections, while central banks have a longer timeframe. But differences that arise from this time-inconsistency problem are best solved in closed sessions, not through virtual stirring.

In a democracy, governments, not unelected central banks, are accountable to the people. Good central banks everywhere are recognizing and accepting this and are not trying to push the framework so far that it is booming with everyone involved.


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