Disentangling RBI-govt ties

The relationship between the central bank and the government is holding back India’s financial sector

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As we enter 2026, the Reserve Bank of India (RBI) governor calls India a “Goldilocks” economy, with robust growth and low inflation. After labour reforms, the next target should be reducing the cost of capital by deepening the financial markets. This might therefore be a good time to untangle the web of nested relationships between the Ministry of Finance (MoF) and Mint Street (RBI), which has created huge conflicts of interest and needs to be disentangled if India wants to deepen and modernise its financial system.

The relationship is often described as a traditional marriage between a husband (MoF) and wife (RBI), with the government playing the proverbial mother-in-law. Disputes are usually settled at home, not in public, and there is no question of divorce. If disputes do arise, the government — like most mothers-in-law — typically sides with the son, that is, the MoF. But sometimes, disputes do spill out.

One such incident was when the huge fraud of % 13,000 crore (approximately $2 billion) at the government-owned Punjab National Bank (PNB) came to light in early 2018, involving still absconding merchants Nirav Modi and Mehul Choksi. The then finance minister Arun Jaitley blamed the RBI for poor regulatory oversight, and the RBI governor shot back in a public lecture arguing that the RBI's regulatory powers over public sector banks (PSBs) are very weak. PSB's have written off % 12 trillion of loans (over $30 billion) between FY2015-16 and FY2024-25, suggesting huge regulatory and oversight problems in them. Another fraud has just been reported at PNB. Private commercial banks have had problems as well but not on the scale seen in PSBs.