Why is RBI independence questioned when we have PC as our hon’ble FM?

I am not too sure what happened in Mr. P Chidambaram’s (PC from hereon) earlier avatars as FM but have witnessed and analysed his two such avatars. First was in 2004-09 which was full of successes (thanks to global economy and previous govt efforts) and second one (from Aug- 2012 onwards) is full of challenges (thanks mainly to his own govt. efforts and star studded economists team).

In both periods what strikes you is how calm PC is with respect to opposition and nothing really angers/fazes him. Contrast this with earlier FM in UPA-2 who threw anger at smallest of hints.

However, one other thing strikes you is how RBI’s independence comes under a q-mark whenever PC is at helm. Like most finance ministers across the world and over time, PC also dislikes tight interest rates but makes it really obvious. The war with the central bank governor comes out in open and this leaves a bitter mouth in the taste.


RBI is one of the few functioning institutions in the country and deserves much better respect from the political bosses. One could argue over virtues and vices of RBI policies but it should be allowed to function with minimal political interference. Again the comparison with earlier FM (and even Yashwant Sinha I am told in 1999-04) who did not really interfere with RBI policies despite RBI hiking rates significantly during his tenure.

So PC shows far more patience towards his political players than to the central bank in general (one could even count his recent dislike for CAG chief Vinod Rai).

What is even more interesting in this dislike and interference is that these Governors have served Finance Ministry and were known to PC. Infact Subba was a Fin Sec during UPA-I before being picked for the main job (Reddy was picked by NDA). So surely he was happier with Subba and picked him for this key position (ahead of Montek and Dr. Kaushik Basu; some say Dr Rajan managed to achieve which Dr Basu was unable to).

Back in 2008, Dr Reddy has clearly earned the respect of markets as he stood for RBI’s independence. The hallmark of his decision making was to stand against rapid capital account libertalisation which FM and his team hugely favored. PC also did not like the rate hikes during Reddy’s end-part of the term. The war of words was out in open and was not a nice sight. The fight got particularly bitter towards the end. It was only in wee hours that Subba was appointed as the Guv. Subba himself came to know of it at the airport after coming to India from some visit.

Subba has not been as fortunate. He came in difficult times (Lehman failed in just 10 days after his joining) and leaving in really difficult times. Despite fighting for RBI’s independence at several occasions, the FM has got the better of him. After all FM is the principal and RBI is just an agent. There is only so much the central bank governor can do. PC has spoken many times on the need to cut rates and expressed his open displeasure against RBI’s reluctance to cut rates aggressively. He asks RBI to cooperate with govt on supporting growth but never really cooperates with RBI to maintain its independence.

His team even pressurised RBI to allow application of banking licences to be opened to all against RBI’s wishes who wanted the pool to be limited. Though do not understand why RBI relented.It should have stood firm.

Though PC did try and help RBI’s cause as he cut fiscal deficit much lower than expected but markets were still not convinced as it was election time. The markets were proven right as Govt passed food security bill in such difficult times that too through an ordinance.

One just hopes Dr. Rajan has drawn his implicit contract with the FM more precisely and clearly. Overall, he has been given a far better deal than other Guvs. But who knows how relations will pan out over a period of time. It s possible that we have same person as FM if we have UPA-3 (Though one dreads UPA in  its another avatar).

Infact, these contracts between Government and Central bankers should be explicit and detailed like in the case of other economies. Central banks are becoming way too important and people need more clarity on what the govt expects from the central banker and central banker expects from the govt.

We have whole set of research on central banks, their optimal targets, behavior etc. Nothing much for finance ministers. That is where the focus should be atleast for emerging markets..

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