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Who Should Control India’s Central Bank?

19 9 28

NEW DELHI – The Reserve Bank of India (RBI) is locked in a bitter public feud with the administration of Prime Minister Narendra Modi over Modi’s attempts to encroach on the central bank’s independence. In fact, the government’s actions are a serious problem, but not for the reason many people seem to think.

Nov 8, 2018 Ian Buruma cautions Democrats against using their electoral gains to try to impeach President Donald Trump.

An independent central bank is widely regarded nowadays as a pillar of a modern economy. But the concept of central-bank independence is relatively recent – and deeply flawed. After all, a central bank performs critical functions – controlling an economy’s base money supply, setting interest rates, regulating banking activities and credit volume, and acting as lender of last resort – that cannot be carried out independently of fiscal and other economic policies.

Support for central-bank independence rests on two assumptions: that the only objective of monetary policy should be price stability, and that efforts on this front should be insulated from the political pressure faced by governments seeking to meet multiple goals, such as employment gains, financial inclusion, and a stable exchange rate. The upshot, however, is that central banks end up answering to financial markets, rather than to governments that are accountable to the public.

But the Modi government’s actions are not intended to link monetary policy to smart fiscal and economic policies, in order to serve the needs of the public more........

© Project Syndicate