Payout to government raises questions about RBI's independence

IT has been a mixed few months since the Indian government introduced its first budget after taking on a second term in office. The economy has been losing growth momentum since the last quarter of 2018. For the past four years, India's GDP growth rate has been around 7 per cent, but since the beginning of 2019, it has fallen to 5 per cent. According to the Reserve Bank of India (RBI), this does not constitute a trend reversal, but rather the downward phase of the economy cycle.

Late last year, India's finance ministry clashed with the central bank, saying it was being excessively cautious. The RBI's capital ratio at the time was 9.6 per cent, which some believed was unnecessarily high. The bank's governor, Urjit Patel, and his deputy, Viral Acharya, discreetly left the institution. The government then appointed a commission chaired by a former RBI governor, Bimal Jalan.

In August, that commission reported the capital ratio could be reduced safely. The RBI announced it would transfer to the government 1.76 trillion rupees (S$34 billion) from its dividend income and by drawing down its reserves. This has raised questions about the central bank's independence, which itself is a recent development. The Bank of England, for example, only gained independence from the UK government in 1997.