The Indian government must heed the RBI's message on financial stability, IMF's Chief Economist Maurice Obstfeld has said, amidst reports of friction between the central bank and the finance ministry over several issues, including how much capital the apex bank needs.
Addressing a group of journalists here on Sunday, he also said the International Monetary Fund does not want politicians "manipulating" central banks for political ends.
"There is debate over whether it's better for financial stability to be the remit of the central bank or an independent regulator...the UK in 1997, split them, then put them back together again," he said, responding to a specific question on the recent developments in India regarding the RBI and the Government.
"I'm 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 added.
"We need to think about what is the best institutional framework in which financial policy can be set with regard to long term stability of the economy, not just to performance over political horizon," Obstfeld said.
"Well, I think they (the RBI and the Indian government) have reached an agreement on how to proceed. I think their (RBI) message that financial stability is important is correct. And it is important for the government to heed that," he added.
In November, the Reserve Bank of India (RBI) board held a marathon meeting amid a rift between the central bank and the government over several issues, including how much capital the RBI needs, lending norms for small and medium enterprises (SMEs) and rules for weak banks.
The Reserve Bank of India (RBI) has massive Rs 9.59 trillion reserves and the government, if reports are to be believed, wants the central bank to part with a third of that fund -- an issue which along with easing of norms for weak banks and raising liquidity has brought the two at loggerheads in recently.
The next board meeting would be held later this week.
Responding to a series of questions on the attempt in certain countries like the US, India, Argentina and Turkey to curb independence of central banks, Obstfeld said central banks' role as a financial regulator is critical.
Central banks have "much greater power than you thought". They are fundamentally involved in financial stability policy, in fiscal policy, he said.
Obstfeld said if one looks at the record, the decisions taken by central banks worldwide did stabilise the economy by avoiding much worse losses in output and employment.
However, at the same time, he said, their moves also raised questions of transparency and accountability.
"So, it's not a shock that people raise these questions and it does create a challenge for central banks to be more transparent and to communicate more effectively with a broader public about what they are about and what they are doing," Obstfeld said.
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 said.
"Clearly, we don't want politicians manipulating the central bank for political ends," Obstfeld added.
After serving as IMF's Chief Economist for more than three years, 66-year-old Obstfeld is set to retire this month-end and will return to the University of California, Berkley. Gita Gopinath, Indian American economist from the Harvard University, would replace him from the first week of January.