The relationship between the central bank and the government, in any scenario, in any country, is one of inter-dependence and a dialogue between them does not mean a compromise of autonomy, RBI Governor Shaktikanta Das said.

“The relationship has to be based on a constant dialogue. To bring about improvement in the financial sector, we need legislative changes.

“In India, for example, the NBFC sector needed many legal changes. We did not have certain powers, which acted as an impediment in the RBI’s ability to regulate and supervise the sector, and resolve failed companies. We engaged with the government, and we got those amendments,” Das told the Central Banking Journal.

Co-operative banks

Referring to India having a large body of co-operative banks, the Governor observed that there was dual regulation – part with the government, part with the central bank.

“It can’t be that way. We again had a dialogue with the government, and we got the required amendments. Now, changes to the law can only be undertaken by the government.

“You need to build that kind of a working relationship with the government because we need their support. In the same way, the government also needs the central bank’s support in many situations – for instance, if there is a liquidity problem,” Das said.

“In the end, you decide what you want to do. But it is useful to share each other’s concerns. In any case, both have the same objective, both are working for the economy.

“Take the inflation situation. While we started tightening liquidity, increasing our policy rate, at the same time, there were many supply-side measures that were required to be undertaken by the government. So, we were in constant dialogue with the government,” Das said.

There will be differences -- the way the central bank and government look at things does vary. It is better to resolve issues through internal discussions, he said.

Building confidence and trust

To a question on the recent runs on some US banks and Credit Suisse and depositors taking out their money immediately with an app, Das said: “In this age of social media, information spreads so fast, and withdrawals are made online.

“A bank that suffers withdrawals of $40 billion in a matter of hours is obviously going to face a big crisis.”

He noted that the key learning is that building confidence and trust in the market and among depositors is critical. That is again linked to governance of the bank.

“Today, it has become necessary for banks that rely on depositors’ money to monitor social media and respond to it. In the RBI, we have a mechanism of monitoring social media.

“Sometimes when we see something, we alert the bank concerned almost immediately: Such and such a story is going around, so you may better deal with it, ” Das said.

Rupee Internationalisation

On internationalisation of the rupee, Das observed that it is a process –  the RBI doesn’t look upon it as an event or a target that has to be reached by a particular date. It is mainly to facilitate a smooth experience for importers and exporters.

Referring to a circular issued in July 2022, permitting rupee settlement of international trade, he said: “After that, quite a few banks from other countries have opened rupee vostro accounts. That is already in process – banks from 18 countries have been given approval to open rupee vostro accounts.”

Also read: The ongoing ‘retail-shift’ by banks may not be structural: RBI Bulletin

Das observed that in India, there is no shortage of dollars, but in some other markets, due to a shortage of dollars, they are unable to do imports.

“So, in a sense, it is a facility we are giving, so countries can continue to import from India and settle in rupees. It also de-risks importers and exporters from both sides, from the volatility of international currencies,” he said.

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