India in spotlight as global central banks battle populists

MUMBAI • It’s open season on central bank chiefs.

In the US, President Donald Trump has complained that the Federal Reserve has gone “loco” because its interest-rate hikes threaten to snuff out his deficit-swelling, tax cut stimulus. Italy’s Deputy Prime Minister Luigi Di Maio accused his compatriot Mario Draghi of “poisoning the atmosphere” after the European Central Bank president warned that the country’s borrowing costs would escalate unless the government pared back its spending plans.

Prime Minister Narendra Modi (picture) wants to keep India’s economy firing as he campaigns for re-election next year. His administration has been pressing the central bank to hand over a part of its surplus reserves to help meet budget goals and ease restrictions on corporate lending by state banks. Reserve Bank of India (RBI) governor Urjit Patel has other priorities: Flush out the pile of non-performing loans clogging the banking system, insulate the rupee from emerging-market jitters and keep a lid on inflation.

Tensions, which had been simmering for months, exploded into public view in late October when one of Patel’s top lieutenants, deputy governor Viral Acharya, delivered a passionate defence of central bank autonomy at a lecture attended by all central bank deputy governors.

The speech appears to have been motivated by the Modi administration’s threat to invoke Section 7 of the RBI Act, 1934, a never-used provision that allows the government to dictate policy to the bank’s chief on matters of public interest. Since then the nation’s newspapers have chronicled each twist and turn of the controversy, including going so far as speculating that Patel will quit in protest.

“Governments that do not respect central bank independence will sooner or later incur the wrath of financial markets, ignite economic fire, and come to rue the day they undermined an important regulatory institution,” Acharya told the gathering. He pointed to the Argentine government’s intrusion into its central bank’s affairs in 2010, which spooked investors and triggered a surge in bond yields, with damaging consequences for the economy.

Acharya could have just as easily cited the experience of Turkey, where President Recep Tayyip Erdogan’s public attacks on the central bank’s independence caused the Turkish lira to plummet. Like those countries, India relies on overseas money to fund investment and is vulnerable to a sudden reversal in sentiment.

The rupee lost more than 10% of its value against the dollar this year, partly on concerns that a slow-moving crisis in the non-bank financial sector will dent growth. While flagging risks to investment activity from tight money conditions, the central bank last month retained its 7.4% GDP growth projection for the financial year ending March.

“These are not good times to be labelled a country which doesn’t respect the central bank’s autonomy,” Raghuram Rajan, a former RBI governor, said in a recent interview on local television. “Running over a central bank has not been good for any economy.”

Signs of a truce appeared on Monday, when a marathon nine-hour board meeting ended with the central bank agreeing to study the government’s demands, including a plan for sharing a part of its surplus capital. While that’s a near-term relief for investors, it also suggests the tough decisions have been kicked down the road and could easily resurface again next year — especially since the government has proposed rules that will allow it greater supervision over the central bank. – Bloomberg