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Modi government must pay heed to RBI for financial stability, says outgoing IMF chief economist

Maurice Obstfeld said central banks play a critical role as financial regulators.

Modi government must pay heed to RBI for financial stability, says outgoing IMF chief economist
A file photo of outgoing IMF Chief Economist Maurice Obstfeld | AFP

Outgoing International Monetary Fund Chief Economist Maurice Obstfeld on Sunday said it was important for the Indian government to pay heed to the Reserve Bank of India’s advice to maintain financial stability, PTI reported.

Obstfeld, whose tenure gets over at the end of the month, was addressing reporters in Washington. Indian-American economist Gita Gopinath will take over from the 66-year-old, who is scheduled to return to his post at the University of California.

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The IMF official praised the policies of Prime Minister Narendra Modi. “India under the government of Prime Minister Narendra Modi has carried out some really fundamental reforms,” he said. “These include the Goods and Services Tax and the Insolvency and Bankruptcy Code.” He described India’s growth performance as “quite solid”.

Asked for his opinion on the alleged spat between the Centre and the central bank, Obstfeld said: “I think they [the RBI and the Indian government] have reached an agreement on how to proceed.” The IMF chief economist said he agrees with the central bank’s emphasis on financial stability.

Obstfeld, however, refused to say whether central banks or independent regulators would resolve the financial stability challenge. “There is debate over whether it is better for financial stability to be the remit of the central bank or an independent regulator,” he added. “The United Kingdom in 1997, split them, then put them back together again. I am 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.”

He said the international organisation does not want politicians to manipulate central banks for political ends. Long term stability needs to be factored into the decision-making process when deciding on an institutional framework, he added.

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Asked about the attempts of the United States, India and Turkey to restrict the independence of central banks, Obstfeld said the institutions have “much greater power” than understood and their role as financial regulators is critical. He cited examples of banks whose decisions helped stabilise the economy by avoiding relatively worse losses in output and employment.

The IMF chief economist also stressed on the importance of transparency and accountability of these financial institutions. “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 added.

Obstfeld predicted a slowdown in global growth and its impact on the United States, The Wall Street Journal reported.

Standoff between Centre and RBI

In November, the Centre reportedly proposed a change in rules that will enable it to supervise the central bank more closely. This came in the wake of speculation about a rift between the finance ministry and the RBI.

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Early last month, a few news reports said the Centre has sought Rs 3.6 lakh crore capital from the central bank. However, government officials clarified there was no such proposal. Jaitley also reiterated that the central government does not require extra funds from the RBI or any other institution to help meet its fiscal deficit target.

At a meeting of its board of directors on November 19, the RBI decided that an expert panel comprising government officials and its officers would examine the economic capital framework to decide on matters related to surplus reserves.

Topic: #rbi
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