Reducing RBI’s role in policy making to hit India’s prospect: Moody’s
Curbing power of the Reserve Bank of India (RBI) in determining key interest rates will have a negative impact on the country’s prospect, Moody’s Analytics—research wing of the rating agency— said in a report. The criticism came days after the Financial Sector Legislative Reforms Commission (FSLRC) proposed the setting up of a seven-member panel for taking decisions on the monetary policy. The proposal suggests a paradigm shift from the existing system under which the RBI governor decides policy rates. “We believe that a government-elected panel undermines the RBI's independence. Moving to the new model would severely dent the RBI's competency: Credibility would be lower, politics would drive decisions, and transparency would be reduced,” Moody’s Analytics said in its report on India Outlook: Waiting for Reforms to Fuel Growth released on Thursday. Last week, the Finance Ministry had issued a draft of the Indian Financial Code (IFC), suggesting the formation of a seven-member committee with four representatives from the government and three from the RBI. However, appreciating the central bank, the report said that the proposed structure will undo the “RBI’s good work”. “Overall, we believe that tampering with the central bank's independence would make it difficult to anchor inflation expectations. This would weigh on India's economic prospects, particularly financial market stability. But given the criticism of the draft bill, it is unlikely to pass Parliament,” it said. Meanwhile, in its weekly outlook released on Thursday, Moody’s forecasted that the RBI is likely to cut the repo rate by at least 25 basis points in its bi-monthly monetary policy to be announced on August 4. “The Reserve Bank of India will likely cut the repo rate by 25 basis points to 7% in August. India's disinflation trend and stronger external balances give the central bank room to cut rates again. With commodity prices continuing to fall, inflation will likely weaken in coming months,” the agency said. The weekly outlook also said that the Indian economy has been in a cyclical upswing since late 2014, but it has failed to gain broader momentum. “Green shoots are slowly emerging, but the government’s failure to deliver promised reforms is the major impediment,” it said. Moody’s also said that the Indian government failure to deliver reforms will restrict the GDP rate at 7.5%. “India’s political infighting is denting business confidence. Without a majority in the upper house, the ruling Bharatiya Janata Party’s power has been nullified and the opposition has blocked proposed reforms. Key reforms such as the land acquisition bill, flexible labor laws, and the Goods and Services Tax have failed to pass parliament. And given the political see-saw, these are unlikely to be delivered until later this year or even 2016,” it said.
July 31, 2015 | 6:52 pm IST.
to success.