RBI – Government to “Respect Central Bank Independence” or Else “Incur Wrath of Financial Markets”

Law and Regulation, News

The tensions between the Reserve Bank of India (RBI) and the government are escalating. On October 29th, the Times of India reported on the increasing schisms between the Indian central bank and the government. So far in 2018, there have been a number of unresolved and public issues.

Tensions reach boiling point between central bank and Indian government

The paper cites six of the more notable clashes this year between the two entities, concerning interest rates, increased regulatory powers, and rules governing banks. Both have taken opposite stands with no resolution in sight. The government has publicly lashed out at the RBI, and the RBI has refused to comply with government requests to provide relief to non-banking finance companies (NBFCs). A member of the RBI central bank board was removed two years before his term was set to end, without being given any warning. This is not good news for any kind of functional economy. Consider the following wording from the RBI deputy governor Viral Acharya –

“Governments that do not respect central bank independence will sooner or later incur the wrath of financial markets, ignite economic fire, and come to rue the day they undermined an important regulatory institution.”

The disparate parts of the executive body are to work in tandem – courts, government, and financial institutions. The idea that a central bank should be independent is absurd, yet this is what has been happening in the past without any pushback from government officials. India is not the only country where the central banks and government agencies seem to be in a struggle, especially over the controversial topic of cryptocurrency. Generally, a central bank will call them illegal, yet the courts will validate them as a legal form of property, as has been the case in China.

What does this mean for cryptocurrency?

The growing schism between the Reserve Bank of India and the Indian government is evidenced in the DLT sector. The RBI issued a blanket ban on cryptocurrency, ordering all banks to stop doing any business with blockchain related companies. Due to this, there was a mass exodus of startups and exchanges from the region.

However, many have questioned the legitimacy of this command sent to commercial banks. It is not for central banks to indicate what constitutes a valid means of payment. Policy-makers are to enact regulations which are then interpreted by the courts – the bank is supposed to dispense finance in accord with the existing rules and regulations, not to create them.

The RBI is not the only bank to do this. In South American countries such as Colombia, Brazil, and Chile, banks simultaneously shut down crypto exchange accounts, arguing that cryptocurrency was illegal or that it would not be possible to fulfill KYC requirements for such accounts. However, RBI is a central bank, and the Supreme court of India is moving incredibly slowly in making any decisions on the matter. In contrast, South American courts seem to be ordering banks to reopen the accounts of the exchanges on the grounds that cryptocurrency is not illegal and that the closures were unjustified. At the very least, the RBI ban on cryptocurrency seems to be an overextension of power.

Digital Nomad with an interest in Zen and Blockchain technology.

Law graduate with 3 years experience as a consultant in the capital markets industry and 4 years experience freelancing on UpWork as a Creative Writer.