Krishna Memani, chief investment officer of OppenheimerFunds speaks during a Bloomberg Television interview in New York. (Photographer: Christopher Goodney/Bloomberg)

India Needs Better Cooperation Between Its Government and Central Bank


If India is going to reach its manifest destiny, its economy must grow at a rapid pace for the next few decades. Without that growth spurt, a sizable part of its large population will be left behind. Both economically and politically, that is an unacceptable outcome.

In the context of a slow-growth global economy, creating a supportive environment for that growth spurt is a hard-enough job. The current power struggle between the central government and the Reserve Bank of India is making that task immensely harder.

What is needed is close coordination between policymakers of all stripes – fiscal, monetary, and legal. Instead, what is unfolding is an old-style schoolyard brawl to see who calls “no mas” first.

What is needed is a build-out and hardening of the policy-making institutions and governance structures that both foreign and domestic investors can count on to get a fair return on their capital and support the growth of the Indian economy at the same time.

Instead, what is unfolding is an undermining of those critical institutions by the government on the one hand and grandstanding by the RBI on the other.
Finance Minister Arun Jaitley with RBI Governor Urjit Patel and SEBI Chairperson Ajay Tyagi at the Finance Ministry in New Delhi, on Oct. 30, 2018. (Photograph: PTI)
Finance Minister Arun Jaitley with RBI Governor Urjit Patel and SEBI Chairperson Ajay Tyagi at the Finance Ministry in New Delhi, on Oct. 30, 2018. (Photograph: PTI)

Also read: Why The Government Thinks The RBI Has Rs 3.6 Lakh Crore In Excess Capital

Cooperation Is Essential

In a democratic emerging economy, the political institutions must work well together and balance both the political and economic needs of the country. That is the underlying reason why politicians get to nominate the officials of the RBI. On the other hand, it is the same underlying reason for the RBI to be set up as a separate institution, away from the Ministry of Finance.

From a foreign institutional investor’s perspective, no priority, beyond crystal clear investment and taxation regulations, is more sacrosanct than the independence of the central bank, especially in the context of an economy like India’s, which is prone to periods of high inflation and fiscal and current account deficits.

If any Indian government truly wants to source investment capital from overseas to fuel its economic growth, it must consider the independence of the central bank and its credibility as a core foundation of that effort. One does not have to look too far back in history to see the clearly negative results of any such effort to undermine that independence.

At the same time, a duly-elected central government has a genuine political mandate. And that political mandate comes with periodic accountability.

A central bank that ignores that power structure and is consumed with its own self-importance is surely not serving its country well.

Economic policymaking is about making choices. And those choices need to be debated openly in a civil and cooperative manner to arrive at answers that make both economic and political sense.

We have been an investor in India for a long time, and we know it is doable. Please get to it before it is too late.

Also read: Raghuram Rajan Says RBI’s Autonomy Must Be Respected

Krishna Memani is Chief Investment Officer at OppenheimerFunds.

The views expressed here are those of the author and do not necessarily represent the views of BloombergQuint or its editorial team.

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