Financial markets sent Indian Prime Minister Narendra Modi’s government a message this week: leave Raghuram Rajan alone.
India’s main stock market fell after the release in New Delhi of a draft proposal that would empower the government to select the majority of members of the Reserve Bank of India’s new monetary policy committee. Modi promised to create a rate-setting panel as part of an overhaul of the way the RBI goes about its work. Inflation was an election issue, and Modi recognized that independent central banks have a stronger track record of containing price increases than those beholden to politicians. Earlier this year, the RBI and the government agreed on an inflation target of 4 percent starting in 2016. (The official aim for this year is to keep consumer price inflation below 6 percent.)
The inflation target was a good sign. The possibility that policy could be set by men and women beholden to the Prime Minister’s Office or the finance minister was a bad one.
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