By Suvashree Choudhury
MUMBAI (Reuters) - India's central bank needs to be more independent to improve macroeconomic stability, Reserve Bank of India (RBI) Deputy Governor Viral Acharya said on Friday, warning that undermining a central bank's independence could be "potentially catastrophic".
In a speech, the text of which was posted on RBI’s website, Acharya also said policies should be "rule-based".
"To secure greater financial and macroeconomic stability, these efforts need to be extended to effective independence for the Reserve Bank in its regulatory and supervisory powers over public sector banks," he said.
His comments come amid government efforts to create a separate regulator for the country's payments system – which is currently handled by the RBI as part of its functions related to banking regulations.
Government officials have also been calling for the RBI to relax lending restrictions for some banks that have a low capital base.
Undermining a central bank's independence was "potentially catastrophic" and could "trigger a crisis of confidence in capital markets," Acharya said.
India’s financial markets have been in turmoil since September due a series of recent debt defaults by Infrastructure Leasing & Financial Services (IL&FS), one of the country’s largest infrastructure financing companies, which triggered worries about the health of the entire shadow banking sector.
While the government and the RBI have taken several steps to ringfence the impact of those defaults by replacing the company's board and increasing banks' funding limits for non-banking finance companies, investors remain sceptical.
Referring to non-banking finance companies, Acharya said that systemic risks can build up in shadow banking when important parts of financial intermediation are kept outside the purview of the central bank which could come at "substantive costs to future generations in the form of unchecked financial fragility."
“The Reserve Bank’s independence has remained a work in progress, an enduring challenge that the nation has been grappling with on an ongoing basis,” he added.
(Writing by Zeba Siddiqui; Editing by Toby Chopra)
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Updated Date: Oct 27, 2018 00:05:21 IST