MUMBAI: Reserve Bank of India (RBI) deputy governor Viral V Acharya on Friday likened a Central bank’s decision-making horizon to a test match, and that of a government’s to a T-20 match. In a hard-hitting speech that might be as controversial as former RBI governor Raghuram Rajan’s speech that drew an analogy of the “one-eyed king in the land of blind”, Acharya said a government’s “decision-making (was) rendered short” due to various considerations like impending elections, be it national, state or mid-term.
“As elections approach, delivering on proclaimed manifestos of the past acquires urgency; where manifestos cannot be delivered upon, populist alternatives need to be arranged with immediacy. Less important in the present scenario, but only recently so, wars had to be waged, financed and won at all costs,” Acharya said on the political expediency that governments look for. “This myopia or short-termism of governments is best summarised in history by Louis XV when he proclaimed ‘Apres moi, le deluge!’ (After me, the flood!),” he quoted.
Delivering the A D Shroff Memorial lecture in Mumbai on Friday, Acharya spoke on the importance of regulatory institutions and the need for the Central bank to be independent.Acharya warned that undermining the Central bank’s independence is “potentially catastrophic” that can trigger a crisis of confidence in capital markets, the markets that are tapped by the governments and other investors in an economy to raise money.
Markets reply to the tug of war with a “rap bond yields and exchange rate on the knuckles”, he said, adding, “The market can discipline the government not to erode the Central bank’s independence, and it can also make the government pay for its transgressions. Interestingly, the market also forces Central banks to remain accountable and independent when it is under government pressure.”
“Unfortunate accidents” can arise, he warned, if there are frequent inroads into the Central bank’s decision-making apparatus. Acharya also touched upon the issue of bank loan losses and said sweeping them under the rug by compromising supervisory and regulatory standards can create a façade of financial stability in the short run, but can become a future risk.“To protect the economy from such short-termism, the RBI is designed to be at a safe distance from the executive branch of the government,” he concluded.