Govt-RBI consultation way forward, says Jaitley after Viral Acharya speech

The latest flashpoint between the finance ministry and the RBI occurred on the back of a liquidity crisis in NBFCs

A day after Reserve Bank of India Deputy Governor Viral Acharya cautioned that the governments that did not respect their central bank's independence would incur the wrath of financial markets, Union Finance Minister Arun Jaitley said regulators must have a wide range of high-quality consultations with all stakeholders. 

“I think, for any regulatory mechanism, stakeholder consultation has to be of a very high quality, which will probably lead to a revisiting of traditional thoughts and opinions. And that’s why, (when) several regulators now publish their approach papers or tentative drafts, they hold hearings, meet individuals, meet groups of stakeholders together and improve upon what’s being said,” Jaitley said at an event organised by IDFC Bank here on Saturday to celebrate its third anniversary. 

He, however, made no direct or indirect reference to the RBI deputy governor's speech and his observations were in response to specific questions posed by Rajiv Lall, founder managing director and CEO of IDFC Bank.

Jaitley said it was with constant consultations between various governments, regulators and stakeholders that India evolved as an economy, and decisions were taken on whether any regulation needed to be relaxed or altered depending on the ground situation. “Governments have to make themselves accessible to stakeholders. They can’t be indifferent,” he said.

Delivering the AD Shroff Memorial Lecture in Mumbai on Friday, Acharya made a strong case for granting more independence to the Reserve Bank of India (RBI). Acharya said the central bank must have more powers to supervise public sector banks and keep its balance sheet strong, and have adequate regulatory scope. This independence, he said, was necessary to secure greater financial and macroeconomic stability.

At the IDFC event on Saturday, when asked by Lall, Jaitley said elected governments were accountable not only to voters and the media but also to stakeholders and regulators.

“With frequent elections you are accountable to the people. You are also accountable to various stakeholders because you have to listen to them and react accordingly. And that is actually a very useful interaction which emerges out of these accountability norms,” he said.

“It makes you wiser, it takes you beyond the domain of traditional theories, dogmatic opinions or even what is stated in a file or in an expert paper. It gives you the empirical evidence of what’s going on. So if you were to meet the bankers, the businesses, the others who are in that business of dealing with finance, money or currency, the empirical evidence is inherently more sound,” Jaitley said.

The latest flashpoint between the finance ministry and the RBI occurred on the back of a liquidity crisis in non-banking financial companies, even as state-owned banks grapple with over Rs 10 trillion worth of toxic assets. 

The finance minister on Friday instructed heads of top public sector banks (PSBs) to ensure there was no further spread of the liquidity contagion in the NBFC sector. The RBI has repeatedly asked for more control over state-owned banks, including decisions regarding their top management positions.

‘Nation higher than any institution or govt’ 

Earlier in the day, delivering the first Atal Bihari Vajpayee Memorial lecture, Jaitley referred to the ongoing fiasco in the Central Bureau of Investigation. 

He asked whether non-accountability of institutions could be a ground for investigative adventurism and masking corruption.

“The nation that is India, is higher than any institution or government. Can non-accountability be a mask for corruption? Can it be a ground for investigative adventurism, or can it, as in case of other non-accountable institution, be a ground for inaction? What does the nation do? It is a major challenge,” Jaitley said.

The Supreme Court has had to intervene in the infighting between CBI Director Alok Verma and Special Director Rakesh Asthana, with both sent on forced leave by the government. Opposition parties led by the Congress made this a political issue, saying that Verma was removed to prevent him from investigating the Dassault Rafale fighter jet deal.