December 31, 2018

RBI and Government: Dissents for national Interest

  Manya Bhatia

Just like students study only for a few days or a night before examinations for a short-sighted benefit which is a good result while ignoring the long-term benefit of gaining knowledge by studying regularly, governments across the globe look at the short-sighted benefits of re-winning elections by reducing interest rates thereby decreasing the tendency to save and reducing unemployment rather than the long-term benefit of economic growth. This is where central bank autonomy comes into play, to cushion the impact of the short-sightedness of political phenomenon on economic cycles.
Conflicting opinions between central banks and governments are being seen very frequently. President Recep Tayyip Erdoğan of Turkey has been pressurizing the central bank not to increase the interest rates despite high inflation and currency depreciation whereas the central bank thinks the opposite is required. A similar situation has been noted in the United States of America, President Trump urged the Federal Reserve not to raise the interest rates in the country breaking the two-decade-long tradition of not interfering with the Federal Reserve to respect their autonomy (at least in the public domain).
These conflicts, however, are worth the controlled inflation rates which have been recorded in most countries with autonomous central banks. The central banks and the government, although independent bodies need to work in the same direction for efficient results seen in terms of economic growth. We have seen several conflicts between RBI and the central government over the years, the most recent one being about what RBI should do with the capital framework range and issues with PSU banks but does that mean that autonomy should be taken away from them?
The most important thing in this regard is that any autonomous government body must highly accountable for all the decisions they take. As quoted by the Federal Reserve Bank of St Louis, with independence, comes the obligation for a central bank to be accountable and transparent. A central bank must be transparent so that people can trust their credibility. It is vital to shield the central bank from political pressure but it is equally vital for the central bank to be straightforward and crystal clear to the government as well as the public.
The central government takes care of fiscal policies and the central bank of monetary policies; however, a country can only progress with the best combination of the two making it necessary for the two parties to maintain healthy relations. The central governments are mostly seen making more liberal decisions in terms of decreased interest rates as seen in Turkey whereas central banks ensure that the inflation rates are maintained, so this conflict between the two parties, in my opinion, is never-ending, however, it can be curbed carefully.
The governments want to decrease the tendency to save which leads to increase in spending and boosting the overall demand in the economy whereas the central banks want to ensure that the economy is not overheated and stability is maintained. Recently, we have seen the resignation of central bank governors/deputy governors of India, Turkey and Brazil. This, in my opinion, coveys that even though the central banks are autonomous, they are still not free from political pressure leading to the governors stepping down.