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IMF monitoring Centre-RBI rift: Says govt should not interfere with apex bank autonomy

The International Monetary Fund(IMF) said Thursday that it was monitoring the situation in India referring to feud between the government and Reserve Bank of India. The world body was against governments interfering with central banks, it added.

IMF director of Communications Gerry Rice told PTI ““I’ve said this before standing here that we support clear lines of responsibility and accountability. And, international best practice is that there should be no government or industry interference that compromises the independence of the central bank and financial supervisor.”

Head of RSS’s economic wing had said yesterday “RBI government should work with the govt” or quit.

There were also reports of Centre mulling to invoke never-before-used Sec 7 of RBI Act, whereby govt can issue directives and force the governor toe in line.

The backdrop
The govt and RBI has been fighting it out on a few issues for a while. While govt believes the central bank should ease lending rules for the 11 banks under prompt corrective action(PCA) framework, RBI stands its ground that such flexibility would undo clean-up efforts done so far.

It all started with IL&FS default on loans from non-banking financing companies(NBFCs)  sending the sector clamouring for liquidity. Though the lenders approached RBI for eased liquidity, the apex bank maintained that the banking system did not witness any spike in borrowing costs and the market was just repricing risk in an evolving situation.

The feud came to light when Deputy Governor Viral Acharya gave a speech saying eroding the independence of central banks would ignite “economic fire”. And that governments that do not respect central bank autonomy will eventually incur wrath of financial markets.

 

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