The Indian government must heed the RBI\u2019s message on financial stability, IMF\u2019s chief economist Maurice Obstfeld has said, amidst reports of friction between the central bank and the finance ministry over several issues, including how much capital the apex bank needs.<\/p>\n
Addressing a group of journalists in Washington on Sunday, he also said the International Monetary Fund does not want politicians \u201cmanipulating\u201d central banks for political ends.<\/p>\n
\u201cThere is debate over whether it\u2019s better for financial stability to be the remit of the central bank or an independent regulator…the UK in 1997, split them, then put them back together again,\u201d he said, responding to a specific question on the recent developments in India regarding the RBI and the Government.<\/p>\n
\u201cI\u2019m not going to take a position on that…But I think…the central bank does have to be intimately concerned with financial stability to some degree and with the payment system,\u201d he added.<\/p>\n
\u201cWe need to think about what is the best institutional framework in which financial policy can be set with regard to long term stability of the economy, not just to performance over political horizon,\u201d Obstfeld said.<\/p>\n
\u201cWell, I think they (the RBI and the Indian government) have reached an agreement on how to proceed. I think their message that financial stability is important is correct. And it is important for the government to heed that,\u201d he added.<\/p>\n
In November, the Reserve Bank of India board held a marathon meeting amid a rift between the central bank and the government over several issues, including how much capital the RBI needs, lending norms for small and medium enterprises and rules for weak banks.<\/p>\n
The Reserve Bank of India has massive Rs 9.59 lakh crore reserves and the government, if reports are to be believed, wants the central bank to part with a third of that fund an issue which along with easing of norms for weak banks and raising liquidity has brought the two at loggerheads in recently.<\/p>\n
Responding to a series of questions on the attempt in certain countries like the US, India, Argentina and Turkey to curb independence of central banks, Obstfeld said central banks\u2019 role as a financial regulator is critical.<\/p>\n
Central banks have \u201cmuch greater power than you thought\u201d. They are fundamentally involved in financial stability policy, in fiscal policy, he said.<\/p>\n
Obstfeld said if one looks at the record, the decisions taken by central banks worldwide did stabilise the economy by avoiding much worse losses in output and employment.<\/p>\n
However, at the same time, he said, their moves also raised questions of transparency and accountability.<\/p>\n
\u201cSo, it\u2019s not a shock that people raise these questions and it does create a challenge for central banks to be more transparent and to communicate more effectively with a broader public about what they are about and what they are doing,\u201d Obstfeld said.<\/p>\n
If the central bank cannot communicate more effectively about what it is doing, then there is a possibility of political manipulation where politicians attack the central bank and undermine it, he said.<\/p>\n","protected":false},"excerpt":{"rendered":"
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