Sunday, November 18, 2012

Effect of central bank independence in a graphic

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.

1 comment:

Praveen Reddy said...

Central Banks in India have in the recent past set examples to the world that they can deliver best in tough times. Decisions by central bankers are called hawkish nowadays.They do know that only monetary policy cannot change the fate of inflation, but that is the only thing which they can do. If the govt. can reduce supply side bottlenecks and try to reduce the headline inflation, bankers will have the leeway to reduce the interest rates. Interest rates hardly affects the profits of Inc. by 1-2%.

Coming to the point of new Bank licenses,there was an era when 10-15 banks went missing in a span of 2-3 years. Unless RBI is strict on banking licenses , the govt. work will increase to chase down the cuplrits.Already police depts, CID, CBI are overburdened. Our Ex- Home minister & present FM needs to have some mercy on them:)