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đź“°RBI vs the Federal Reserve | Daily India Briefing

Three stories on Indian markets that you can't miss.

July 25, 2025

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As U.S. President Trump publicly rails against his Federal Reserve Chair, Jerome Powell, openly threatening the independence of the Federal Reserve, it prompts an interesting question for Samosa Capital. Indian Prime Minister Modi does not speak out against his RBI Governor nearly as often, but is the Indian central bank properly guarded from political influence?

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Is India’s Central Bank Truly Independent?

When economists speak of central bank “independence,” they usually refer to the ability of a monetary authority to set interest rates without political interference. On paper, both the Reserve Bank of India (RBI) and the U.S. Federal Reserve meet that definition. Both target inflation, publish rate decisions, and issue public minutes. But scratch beneath the surface, and the institutional DNA starts to diverge. One functions as a fiercely guarded technocratic institution. The other, while influential and intelligent, sits increasingly exposed, nudged and navigated by the political power center in New Delhi.

This divergence isn’t just academic, it’s shaping the path of interest rates, inflation credibility, and financial regulation across the world’s largest and oldest democracies.

MPC ≠ Independence

In the United States, the Federal Reserve’s independence is safeguarded by structure. The Fed Chair can’t be fired at will. Governors serve staggered 14-year terms. And, crucially, the central bank funds itself, meaning it can’t be starved or rewarded through the annual budget process. Congress may rage, presidents may tweet, but monetary policy moves on largely undisturbed.

India’s RBI is more complicated.

In 2016, Parliament created the Monetary Policy Committee (MPC) through an amendment to the RBI Act. Composed of six members, three from the RBI and three appointed directly by the central government, it is now the primary body responsible for setting interest rates. The RBI Governor chairs the committee and holds a tie-breaking vote, but the inclusion of government-appointed “external members” means the central bank no longer holds a monopoly on rate-setting.

While the original intention of the MPC was to insulate interest rate policy from ad hoc political preferences, it has arguably had the opposite effect, institutionalizing political proximity. Unlike the Fed’s FOMC, where regional Fed presidents are largely apolitical, the government’s MPC appointees often have direct advisory or academic ties to ruling party initiatives. In a recent policy vote, two of the four members who dissented, arguing for rate cuts, were external members appointed by the Modi government. One of them, Dr. Ashima Goyal, is a respected economist, but also serves on the PM’s Economic Advisory Council.

The structure is clear. But independence? Less so.

RBI Governors Come and Go — When They Say “No”

Sanjay Malhotra, RBI Governor

If legal structure defines independence in theory, institutional memory reveals how it plays out in practice. And India has seen a pattern: central bank governors who resist political pressure rarely last long.

In 2016, the RBI was thrust into executing demonetization, effectively voiding 86 percent of India’s currency overnight at the government’s request. While the policy was announced by Prime Minister Modi, its implementation required RBI consent. Critics argue that the central bank either folded under political pressure or was excluded from meaningful deliberation altogether. Former Governor Y.V. Reddy called it a “national problem” that the RBI had played such a passive role.

Just two years later, Governor Urjit Patel resigned after resisting government pressure to release surplus reserves. Patel argued the central bank needed to hold its capital buffers to maintain credibility and support the rupee. Instead, the government opened the Bimal Jalan committee, and in 2019, the RBI transferred a record $20.4 billion (₹1.76 trillion) to the Centre, a figure that many economists saw as less a “surplus” than a forced dividend.

The message was clear: resist too hard, and you’re out.

Central Bank or Super-Regulator?

Another critical difference between the RBI and the Fed lies in regulatory scope. The Fed supervises commercial banks and conducts monetary policy, but in India, the RBI is arguably the most powerful economic regulator in the country. It controls capital flows, supervises public and private banks, sets limits on CEO salaries, approves (or blocks) management promotions, and regulates entire fintech ecosystems.

It even has the authority to direct private banks to take over failing ones or initiate write-downs in the interest of systemic stability. It has exercised that power liberally in recent years, freezing Paytm Payments Bank, penalizing Kotak Mahindra Bank for non-compliance on top-level appointments, and holding tight control over cross-border remittances.

In this context, critics argue, the RBI isn’t just a central bank, it’s a shadow finance ministry. And this regulatory reach makes its independence even harder to protect. The government has strong incentives not just to nudge monetary policy, but to actively steer regulatory behavior.

Which raises a provocative question: if independence is so difficult to preserve, should the RBI be less powerful, rather than more insulated?

The Fed Comparison: A Higher Bar

To understand the gap, consider how the Fed handled COVID-era liquidity. It coordinated with the U.S. Treasury through Congress-approved programs, but its actions, from quantitative easing to Main Street lending facilities, were launched with clear boundaries and sunset clauses. Even when President Trump repeatedly demanded rate cuts or tweeted criticisms of Chair Jerome Powell, the Fed stood pat. No resignations. No retaliatory reviews. Just a news conference and a dot plot.

Meanwhile, during COVID, the RBI deployed targeted repo operations, relaxed regulatory guidelines for NBFCs, and absorbed massive government bond supply, all of which had fiscal implications. But few of those measures were debated in Parliament, and most were executed with minimal explanation.

The difference? Legitimacy through distance. In the U.S., the Fed’s independence makes it politically unpopular but economically credible. In India, the RBI’s proximity makes it politically flexible, but sometimes economically suspect.

Fed Chair Jerome Powell (left-most), with other global central bank leaders

Where Does This Go?

To its credit, the RBI has built a reputation for intellectual rigor, especially under Governors like Raghuram Rajan and current chief Shaktikanta Das. But its institutional position is increasingly fragile. As India’s capital markets deepen and fintech grows more central to the economy, the RBI’s ability to act independently, not just in policy, but in regulation, will be tested more frequently.

The government could go one of two ways. Option A: Respect the RBI’s autonomy, even when it contradicts short-term fiscal goals. Option B: Limit the scope of RBI’s powers, reducing the incentive to interfere in the first place.

Either way, something has to give. Because a central bank cannot be simultaneously autonomous, expansive, and politically convenient.

Final Thoughts

India’s Reserve Bank is not a rubber stamp. But neither is it the Fed. It operates in a dense political ecosystem, where regulatory authority and monetary policy frequently intersect with electoral cycles and headline economics. Its independence is not a switch, but a spectrum, and over the past decade, that spectrum has tilted uncomfortably close to the corridors of North Block.

If India wants a central bank that markets trust unconditionally, it may need to revisit not just who leads it, but what it leads.

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Written by Eshaan Chanda & Yash Tibrewal. Edited by Shreyas Sinha.

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