Chief Economic Adviser Arvind Subramanian on Monday said that a central bank acquires its independence through its actions and good decision-making and not just law, The Indian Express reported. A series of bad decisions could also impact a central bank’s credibility, he added.
Subramanian’s statement came days after Reserve Bank of India Governor Urjit Patel said the bank has “very limited authority” to hold state-run banks accountable. “Legal reforms are highly desirable to empower the RBI to fully exercise same responsibilities that apply for public sector banks to private banks as well,” Patel told students at a law university in Gujarat on March 14. “Legal reforms are also desirable to empower RBI to ensure a level playing field in supervisory enforcement.”
Patel said that officials at the central bank “also feel anger, hurt and pain at banking sector frauds and irregularities”.
Subramanian told students at Jesus and Mary College in New Delhi on Monday that a central bank’s credibility does not depend only on its independence. “After all, if you are independent and make a series of bad decisions, you lose credibility.”
The chief economic adviser emphasised that coordination between the central bank and the government is important. Central banks around the world were given independence as countries wanted to give them the freedom to take decisions irrespective of the election cycles, he pointed out.
“The other problem is that sometimes the central banks may have to do what governments can’t do,” Subramanian said. “Example, the Fed and the European Central Bank, they put their balance sheets at risk to stimulate the economy. Now if you have a very traditional notion of what central banks should do, that would be considered actually not the right thing to do.”
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