There’s been an unusual development in the government of India this week. The country has seen developing public tension between the head of the government and the head of the central bank — something that has also been happening in the United States. But in India, this has led to a dramatic change in the midst of global market volatility.
The head of India’s central bank has resigned in the middle of his term.
Urjit Patel cited “personal reasons” for stepping down from the Reserve Bank of India. But for months, reports have been swirling about disputes with the government of Prime Minister Narendra Modi.
Tension between a central bank and the leadership of an elected government is not unusual. Former Federal Reserve chief William McChesney Martin once famously said the job of a central bank is to “take away the punch bowl just as the party gets going” — in other words, raise interest rates just as economic activity peaks.
That doesn’t always work out with election cycles — or politics.
In October, President Trump departed from U.S. tradition by criticizing the Fed for raising rates “too quickly.” Other countries from Ukraine to Argentina have had public disputes between leadership of the government and the central bank.
As for India, the prime minister has an eye on next year’s election — and not only on interest rates. Local media reports say his government would like to use some of the central bank’s surplus currency reserves to finance a public spending package.
There’s also disagreement about troubled state-owned banks, and whether they should be able to resume loans to small businesses — a move the government favors, while the bank takes a more conservative view.
The Reserve Bank of India has its next meeting on Friday.