In light of media reports of deepening divide between the Reserve Bank of India (RBI) and the Finance Ministry, a reminder about the importance of independent central banks may be appropriate. A couple of years back, Ben Bernanke pointed to the example of UK's decision to grant independence to the Bank of England (BoE) to drive home the point.
In May 1997, the BoE's charter was revised and it was re-born as an independent central bank. The impact of this on the yields of UK's long term government securities was spectacular. It nearly halved over the year. Here is a graphic from the excellent Fred that captures this change.
This alone should be reminder to those at the North Block when they appoint the successor to Dr Subba Rao next year. The hard won credibility of the RBI can be squandered in one moment of madness.