RBI Independence Quietly Buried, Without a Murmur from Credit Rating Agencies


EXECUTIVE SUMMARY. The resignation of Viral Acharya, deputy governor, Reserve Bank of India (RBI) six months before his term was to end, was preceded by the resignation of Urjit Patel. Earlier, Raghuram Rajan failed to get a second term as RBI governor. However, these developments did not bring on the “wrath of the financial markets” prophesied by advocates of central bank independence. Acharya’s days were numbered after his immature public rebellion against the government and the resignation of then RBI governor Urjit Patel. With the arrival of former government bureaucrat, Shaktikanta Das, as governor, the outlook of the monetary policy committee has also drastically changed from a hawkish stance on inflation to a dovish outlook. With the about-turn of the alpha hawk on the committee, Michael Patra, executive director, RBI who now favours lowering interest rates, there remains just one lonely hawk on the committee, and the government is firmly in control of the ‘independent’ monetary policy committee.

Contrary to warnings in the literature, the early departures of central bankers who had championed the cause of a central bank independent of the government, and the likely takeover by the government of monetary policy committee, have not ravaged the Indian financial market. The relatively benign reaction by the capital market to this heresy indicates that, when push comes to shove, the market is more influenced by international liquidity and interest rate differentials than by the host country’s perceived adherence to principles of central bank autonomy. On the eve of the Union Budget, perhaps the government may want to test whether the market can similarly absorb an expansionary fiscal policy to stimulate growth along with a lower interest rate regime.



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