Governments that do not respect the central bank’s independence will sooner or later incur the wrath of financial markets, ignite economic fire, and come to rue the day they undermined an important regulatory institution, cautioned Viral Acharya, Deputy Governor, Reserve Bank of India.
He also emphasised that governments, which invest in central bank independence, will enjoy lower cost of borrowing, the love of international investors, and longer life spans.
Referring to the good progress made in earning the Reserve Bank’s independence, most notably in the monetary policy framework, Acharya said to secure greater financial and macroeconomic stability, such efforts need to be extended to effective independence for the central bank in its regulatory and supervisory powers over public sector banks, its balance sheet strength, and its regulatory scope.
In his speech, ‘On the Importance of Independent Regulatory Institutions – The Case of the Central Bank’, at the AD Shroff Memorial Lecture, the Deputy Governor underscored that such endeavour would be a true inclusive reform for the Indian economy’s future.
The right choices
Thankfully, it is only a matter of making the right choices, which I believe as a society, we can with adequately thoughtful “what-if” analysis, said Acharya in his speech, where he highlighted that a central bank that is independent from the executive branch of the government is important for a well-functioning economy.
“A government’s horizon of decision-making is rendered short, like the duration of a T20 match (to use a cricketing analogy), by several considerations. There are always upcoming elections of some sort – national, State and mid-term. In contrast, a central bank plays a Test match, trying to win each session, but importantly also survive it, so as to have a chance to win the next session, and so on… To protect the economy from such short-termism, the central bank is designed to be at a safe distance from the executive branch of the government,” he explained.
Indeed, by their mandate, central banks are committed to stabilise the economy over business and financial cycles, and hence, have to peer into the medium to long term, added Acharya.