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ence are potentially catastrophic, a
Tehelka Bureau “self-goal” of sorts, as it can trigger a
crisis of confidence in capital markets
that are tapped by governments to run
he Reserve Bank of India their finances”.
and the Union Government
appear to be on a collision New kid on the block
course if developments Why independence of the central bank
T of recent days are any in- is important is because the inclusive
dication. So much so that the union economic and political institutions
Finance minister Arun Jaitley has ac- involve plurality in decision-making
cused the RBI of its failure to check in- which help guarantee the rule of law
discriminate lending by public sector and foster talent and creativity. Some-
banks during 2008 and 2014. The war what less celebrated is the institution
of words between the government of an independent central bank, per-
and the RBI took an unprecedented haps not just because the central bank
turn when the finance minister at an is a relatively new kid on the block
event organised by the US-India Stra- because it interacts less directly with
tegic and Partnership Forum went on the public though its true influence is
to comment that the Central Bank had far- reaching.
been sleeping on the job. That shows
the bitterness between the two.
The finance minister said during his
speech “The central bank looked the Independence of the
other way as the bank credit growth apex bank is crucial
in one of these years was 31%, against
the normal trend of 14%. I do not know because the inclusive
what the central bank was doing. It was economic and political
a regulator... They kept pushing truth
below the carpet.” institutions involve
Dr. Viral V Acharya, Deputy Gover- function of the government; its pow-
nor of RBI during his A.D. Shroff Lec- plurality in decision- ers are enshrined as being separate
ture in Mumbai on October 26, 2018 making which help through relevant legislation. Its tasks
“On the importance of regulatory in- being somewhat complex and techni-
stitutions-the case of the Central Bank” guarantee the rule of cal, central banks are ideally headed
quoting Alberto Ramos, Argentina law and foster talent and manned by technocrats or field ex-
analyst at Goldman Sachs said “Using perts – typically economists, academ-
central bank reserves to pay govern- and creativity ics, commercial bankers, and occa-
ment obligations is not a positive de- sionally private sector representatives,
velopment and the concept of excess appointed by the government but not
reserves is certainly open to debate. It A central bank performs several elected to the office. This architecture
weakens the balance sheet of the cen- important functions for the economy: reflects the acceptance of the thesis
tral bank.” it controls the money supply; sets the that central banks should be allowed to
He observed at the outset that “this rate of interest on borrowing and lend- exercise their powers independently.
complex interplay of the sovereign’s ing money; manages the external sec-
exercise of its powers, the central tor including the exchange rate; super- T20 vs Test Match
banker’s exit, and the market’s revolt, vises and regulates the financial sector, Why is the central bank separate from
will be at the center of my remarks on notably banks; it often regulates credit the government? A government’s ho-
why it is important for a well- func- and foreign exchange markets; and, rizon of decision-making is rendered
tioning economy to have an independ- seeks to ensure financial stability, do- short, like the duration of a T20 match,
ent central bank, a central bank that mestic as well as on the external front. by several considerations. There are
is independent from the executive The world over, the central bank is always upcoming elections of some
branch of the government. I will also set up as an institution separate from sort — national, state, mid-term, etc.
try to lay out why the risks of under- the government; put another way, it As elections approach, delivering on
mining the central bank’s independ- is not a department of the executive proclaimed manifestos of the past

Tehelka / 15 november 2018 42 www.Tehelka.com

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