India’s Central Bank Under Attack
So far, Reserve Bank of India Governor Urjit Patel has refused to cave in to government pressure for politically expedient but economically risky policy changes – a stance that has boosted the RBI's credibility. But that credibility could yet be destroyed if the government's attacks continue, especially if they lead to Patel's removal.
ITHACA – Indian Prime Minister Narendra Modi’s government has launched an all-out political assault on the Reserve Bank of India, and the barrage of criticism is already taking a toll on the institution. This is an alarming development for India, because the RBI’s credibility and effectiveness have contributed substantially to macroeconomic and financial stability, thereby helping to sustain rapid GDP growth in recent years.
One key criticism leveled against the RBI is not unique to India: the central bank, the government claims, is impeding growth by raising interest rates in the name of a misguided fear of excessive inflation and financial instability. US President Donald Trump has leveled similar complaints at the Federal Reserve, claiming that interest-rate hikes are dampening economic growth and the US stock market.
But the threat such attacks pose to the RBI dwarf those faced by the Fed, not least because, unlike the Fed, the RBI has no statutory independence. Making matters worse, the Modi government has, for the first time ever, invoked Section 7 of the RBI Act, which allows it to issue directions directly to the central bank governor on matters of public interest.