Pitfalls of taking on RBI

It is typical of the Narendra Modi government to want to have its finger in every pie and in this case it is in the functioning of the Reserve Bank of India. However to be fair to the Prime Minister, India is not alone in this. There has been a discussion on this issue even in the European Union in relation to the independence of the European Central Bank which has a quasi-constitutional basis. Its independence is guaranteed under Article 108 of the Treaty establishing the European Community, which states that: “Neither the ECB, nor a national central bank… shall seek or take instructions from community institutions or bodies, from any government of a Member State or from any other body”. In fact the member of the Executive Board of the ECB has gone so far as to say that society as a whole, including the media and public opinion, should see that the independence of the central bank is preserved.

More recently US President Donald Trump reacting to the hike in interest rates announced by the Federal Reserve (the US equivalent of the RBI) in October said “the Fed is going loco (crazy)” by increasing interest rates.

However, even though the Modi government has denied that there is any proposal to form panels to oversee various functions of the RBI, there has already been a reaction from the Netherlands where the chief economist of the Rabobank International said that it did not bode well in the short term for confidence and the Indian rupee. This is a pointer to the pitfalls in case the government at any time in the future decides to take on the RBI.