Trump vs Powell puts spotlight on central banks' independence: How does RBI score?

Mint

6 hours ago

The very public friction between US President Donald Trump and Federal Reserve Chair Jerome Powell has once again thrust central bank independence into the spotlight. The underlying question is both simple and consequential: should elected leaders have a say in how central banks set interest rates?
This tension isn't new. Trump repeatedly criticised the Fed's rate hikes during his earlier term. European leaders were unsettled by the European Central Bank's aggressive tightening in 2022. And back in 2018, India witnessed its own showdown between the Reserve Bank of India (RBI) and the finance ministry. Still, the consensus among economists is clear: independent central banks are critical to maintaining macroeconomic stability.
To measure the independence of central banks across countries and time, researchers have created an index based on some core criteria. Each criterion is assigned a score, and then these scores (with or without weights) are used to arrive at an index value, ranging from 0 to 1, with 1 representing the highest level of independence.
Common central bank parameters assessed in these indices include rules of appointment of the governor and the monetary policy committee, freedom to formulate monetary policy, norms for conflict resolution, primary policy objective, rules for lending to government, financial independence, and reporting and disclosure norms.
A recent index assigns India's RBI a score of 0.59, indicating moderate independence.
RBI's report card
The RBI scores high on several key parameters of central bank autonomy. It has a clear inflation-targeting mandate, operates with an independent budget, and adheres to sound reporting and disclosure standards.
However, its overall independence is moderated by structural constraints, most of them stemming from its ownership and governance structure.
These can be grouped into three categories.
First, while the six-member Monetary Policy Committee (MPC) includes three external members and three RBI representatives, all are appointed by the government. The RBI governor, also a government appointee, holds the casting vote in case of a tie. Second, in the event of a policy disagreement, the government retains the final say. Both these rules are seen as a lack of independence in monetary policy.
Third, under the RBI Act, the central bank is required to transfer its surplus to the government after meeting expenses and provisioning. This is viewed as a lack of financial independence.
Despite these limitations, the RBI has largely delivered on its core mandate. Between August 2016 and June 2025, inflation exceeded the official upper tolerance band of 6% in just 28 of 107 months. Inflation volatility has also declined significantly since the adoption of flexible inflation targeting (FIT). Through the turbulence of the last five years, when RBI shifted from covid-era easing to post-pandemic tightening, inflation fluctuations were still lower than in the pre-FIT years.
Importantly, the RBI has built credibility as a steward of price stability. Its consistent emphasis on the 4% inflation target has helped anchor public expectations, even though households tend to overestimate inflation by 3-4 percentage points, their expectations remain stable over time.
Independence and co-operation
If India's central bank, despite being government-owned, manages to do its job well, should it still aspire to greater independence? Perhaps. Research shows that greater central bank independence is associated with lower inflation and more effective monetary policy in the long run, especially for developing economies. However, India's situation is different for two reasons.
One, the scope for conflict on monetary policy is slightly lower. Conflict is most likely when inflation is on its way down: the government would prefer lower rates to boost growth, while the RBI may want to wait until inflation is stamped out. But given that inflation is as much a political hot potato as a monetary headache—elections have been lost on the price of onions—the government is more sensitive to inflation, and less likely to demand rate cuts until inflation is under control.
Two, the present government is committed to reducing its fiscal deficit and debt. Therefore, it is unlikely to push for lower rates just to reduce debt servicing costs. When governments are fiscally profligate, monetary policy has to compensate by printing money or keeping interest rates at artificially low levels. In contrast, fiscal prudence frees monetary policy from the pressure of propping up budget deficits.
Central bank independence in itself does not guarantee effective policy. The US Fed has full independence in setting monetary policy, yet hasn't escaped criticism from the White House. Turkey has a high independence score of 0.8 out of 1, but President Recep Tayyip Erdoğan's policy interference has led to runaway inflation.
The takeaway? Independence is necessary but not sufficient. What matters most is whether fiscal and monetary policy can work in sync. Price stability is best achieved when governments and central banks act as partners, not adversaries, in managing the economy.
The author is an independent writer in economics and finance.