The government and the RBI have always been at loggerheads. The RBI is super slow in some matters (like opening market access, allowing retail to buy bonds directly etc). ANd it's very good in others - interest rates, bank NPA recognition (though even that is only recent). etc.
The government though has issues with stupid things. Like why are you not letting banks lend. Or why should RBI okay our choice of bank chief. This is stupid because this is really what the RBI does for the private sector banks and it's done well there mostly.
But the govt lets the RBI get away with total incompetence as well. For instance we were supposed to get retail access to g-secs five years back, it's still only tiny. Why? Because RBI loves its silly SGL and won't get rid of it easy.
RBI's payment system regulation is way too much, and we do need independence because RBI doesn't like anyone that isn't a bank. So non-banks can't do creditcards. Can't do UPI cos RBI won't let non-banks get into NPCI. Needed independent regulator different from RBI.
Similarly we need a "treasury" division of hte government that will control bond issuance. Not RBI. RBI cannot be a bank regulator which mandates how much g-secs banks should have, and also the bond issuance controller that is responsible for selling g-secs to banks.
SO if the government takes this function away from the RBI, is it overreach? Of course not. RBI will crib about "interference" with operation, but that's just a power struggle. It shouldn't have been so many things - just a proper central bank (prints currency, sets rates).
The RBI is the bond market regulator (that should be SEBI or carved out of RBI into a SEBI division - and SEBI needs major overhaul here too). The RBI is the forex reserve manager, a currency trader, and also the deposit insurer; all a bit much, I think.
I've argued that these functions should be cut up: capitalmind.in/2013/02/cut-up…
Still, this doesn't mean the government should interfere (and despite much of what its saying, it hasn't really done that). THe govt needs to have PSU banks strongly regulated by the RBI, for example.
Still, this doesn't mean the government should interfere (and despite much of what its saying, it hasn't really done that). THe govt needs to have PSU banks strongly regulated by the RBI, for example.
And at the same time, the government needs accountability from the RBI. They aren't accountable, and they're not voted, so the RBI needs to be answerable to someone. Delaying stuff endlessly, denying information when it seems fit etc. are things RBI has done, despite complaints.
THe US has many institutions: the fed (which is by itself an amalgamation), the FDIC, the SEC, a treasury, and a few others, all of which do different regulatory functions. India can't just have an RBI for all these, and we shouldn't over react to complaints of govt interference.
Btw, I think the government's demand for PCA banks to resume lending or for lower interest rates is just dumb. PCA banks should be merged - they simply haven't got the capability to lend. Interest rates are now a function of inflation and the committee does a good job there.
