Central bank freedom: Where does RBI stand?

The very public friction between US President Donald Trump and Federal Reserve Chair Jerome Powell has once again thrust central bank independence into the spotlight. The underlying question is both simple and consequential: should elected leaders have a say in how central banks set interest rates?

- Deepa Vasudevan

This tension isn't new. Trump repeatedly criticised the Fed's rate hikes during his earlier term. European leaders were unsettled by the European Central Bank's aggressive tightening in 2022. And back in 2018, India witnessed its own showdown between the Reserve Bank of India (RBI) and the finance ministry. The consensus among economists is clear: independent central banks are critical to maintaining macroeconomic stability.

To measure the independence of central banks across countries and time, researchers have created an index based on some core criteria. Each criterion is assigned a score, and then these scores are used to arrive at an index value, ranging from 0 to 1, with 1 representing the highest level of independence.

Common central bank parameters assessed in these indices include rules of appointment of the governor and the monetary policy committee, freedom to formulate monetary policy, financial independence, and reporting and disclosure norms. Two recent indices assign India's RBI scores of 0.36 and 0.59, indicating moderate independence.